(Repeats Monday column)
By Andy Home
LONDON, Sept 5 Zinc continues to glow red hot
amid the general gloom pervading the industrial metals sector.
On the London Metal Exchange (LME) three-month metal
closed last week valued at $2,364 per tonne, up 50 percent on
the start of the year and the highest it's been since May last
Everyone, it seems, is still buying into the galvanising
metal's enticing narrative of supply shortfall, something of a
stand-out in a sector that is more worried about the weak state
So too is Nyrstar, the Belgian zinc smelting giant.
"We believe that the zinc price should continue to rise on the
basis of improving supply and demand fundamentals", said the
company's chief executive officer, Bill Scotting.
Except that statement accompanied a notification that the
company has just initiated a hedging programme, essentially
locking in forward prices through the end of the first quarter
of next year.
Which raises the question as to whether Nyrstar thinks this
year's rally might be about to run out of steam.
Should zinc bulls be worried?
THE NYRSTAR HEDGES
Nyrstar has used the options market to mitigate the
potential for lower prices over the coming months.
The "collar structures", as they're called, involve the
purchase of put options, which confer the right to sell, and the
simultaneous sale of call options, which confer the right to
The net effect, as Nyrstar explained, is to eliminate price
exposure outside of a $2,137-2,437 per tonne price band through
the end of this year.
A similarly structured hedge over the first quarter of next
year will do the same in a $2,100-2,457 price band, with
exposure kicking back in at a price above $2,800 per tonne.
There are several points worth noting here.
Firstly, Nyrstar has done this sort of thing before. Similar
short-term "strategic" hedges on the zinc price were put in
place in both 2013 and 2014, while the company has this year
also hedged its foreign exchange exposure.
Secondly, the latest hedges cover only a small part of the
company's production, around 8,000 tonnes per month of metal.
Production guidance this year is 1.0-1.1 million tonnes,
equivalent to 83,000-92,000 tonnes per month.
Thirdly, Nyrstar is going through a wholesale financial
restructuring, including the disposal of its zinc mining
business, as it tries to shore up its balance sheet in the wake
of zinc's plunge to a multi-year low of $1,444.50 per tonne in
January this year.
Given Nyrstar's trials and tribulations, locking in a degree
of pricing certainty on part of its output is understandable.
But it also means that Nyrstar's zinc hedges may say as much
about the company as they do about the zinc price.
The more interesting question, though, is whether other
producers are thinking, and doing, the same.
Graphic on LME options open interest:
Because the other unique thing about Nyrstar's hedges is
that the company publicly discloses them in explicit detail.
Plenty of other producers don't.
But there are signs that others may also be capitalising on
zinc's super-strong rally to, quite literally, hedge their bets.
Take the LME options market, for example.
Back in June all the excitement was about what was happening
on the upside, with super-bullish plays being put on strike
prices as high as $3,000 per tonne in June 2017.
Those call options are still open, by the way, but in the
interim the overall tenor of the LME options market has changed.
Back in June open interest on calls through January 2018
totalled 42,582 lots, while open interest on puts stood at just
Fast forward a couple of months, however, and the playing
field has shifted in favour of put options.
There are now 48,679 lots of open interest on put options
through January 2018, exceeding the 44,914 lots of open interest
on the calls.
The last few days in particular have seen some fairly heavy
volumes go through on puts at the $2,000, $2,100 and $2,175
strike prices across the front three months.
The scale of the shift in positioning goes way beyond
anything that could be attributable just to Nyrstar's hedging.
The increase in put option open interest since June
represents almost 562,000 tonnes.
Evidently, others are thinking the same about the
sustainability of the zinc rally as Nyrstar, even if they don't
have the Belgian company's specific balance sheet pressures.
Moreover, options are only one way of hedging forward price
The more conventional path is in the form of forward sales
and here too, the shape of the forward zinc curve on the London
market should give pause for thought.
Beyond January next year the curve is firmly backwardated,
which seems to bear out chatter on the LME "Street" about what
one broker, Kingdom Futures, has called "aggressive forward
producer hedging programs".
Note the plural in that last word.
THE ONLY WAY IS UP
Now, none of this should be too surprising and is not
necessarily overly bearish.
Zinc has risen in almost a straight line since those January
lows and even those sitting on healthy profits may be tempted to
lock in a bit of downside protection.
Particularly, given the multiple moving parts of the supply
picture, which after all is what everyone is bullish about in
the first place.
Of course, the single biggest "known unknown" is for how
long Glencore will hold its 500,000 tonnes of production
curtailments. These have acted as a powerful accelerator to the
tightening in the zinc raw materials market.
If Glencore were itself hedging forwards, that would
seriously weaken the bull case, raising the possibility of that
capacity being restarted.
Unlike Nyrstar, however, Glencore isn't in the habit of
issuing statements detailing its hedging strategies.
(Editing by Louise Heavens)