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(The opinions expressed here are those of the author, a columnist for Reuters.)
* LME Stocks and Price: tmsnrt.rs/2toogSs
By Andy Home
LONDON, July 7 (Reuters) - The zinc funds-fundamentals pendulum has swung again.
Back in May funds were beating a collective retreat from the London zinc market after a second failed attempt at the big-number $3,000-per tonne resistance level.
The London Metal Exchange (LME) three-month price troughed at $2,427.50 on June 7, since when it has bounced back to a current $2,783.00.
Funds have returned with a vengeance, according to LME broker Marex Spectron, which estimates they have gone from net short at the start of June to net long. Indeed at over 20 percent of open interest speculative length is back to levels last seen in January.
What's caused this sharp shift in positioning?
The short answer is LME stocks. While the headline number continues to tick lower, now down by 146,600, or 34 percent, on the start of the year, "live" on-warrant tonnage has slumped to levels not seen since 2007.
There were 109,100 tonnes of net new cancellations over the course of June, leaving on-warrant inventory standing at a depleted 70,350 tonnes.
LME time-spreads have tightened accordingly, the benchmark cash-to-three-months period CMZN0-3 trading close to level after being in relatively comfortable $19-per tonne contango just a month ago.
Disappearing visible inventory has rekindled zinc's stop-start bull narrative of supply shortfall.
LME inventory levels have been a false friend for zinc's many bull admirers in recent times.
Stocks have for years now been highly concentrated in New Orleans, a location that has seen mass movement between on- and off-market storage driven not by physical market but by financing drivers.
The most recent manifestation was the appearance of 22,100 tonnes of zinc in LME sheds in New Orleans at the start of May.
Since then, however, total inflow into the LME storage system has amounted to just 125 tonnes and that at Port Klang in Malaysia.
There are still grounds for caution, particularly in the form of the large short position sitting on the LME's July prime prompt date (July 19).
Representing between 30 and 40 percent of open interest <0#LME-FBR>, will it be closed out, rolled or physically delivered?
We won't have to wait long to find out, but countering the potential for more smoke and mirrors is a real tightening in the zinc supply chain in the North American market
Although it's dropped out of the headlines, the strike at the CEZ refinery in Canada, North America's second-largest producer of refined zinc, is rumbling on into its fifth month.
CEZ is majority owned by the Noranda Income Fund but is in essence a tolling plant for Swiss powerhouse Glencore and members of Canada's United Steelworkers union were making their views heard at Glencore's annual meeting on May 24.
Noranda Income Fund has been tight-lipped about the impact. Its last official comment in March, one month into the strike, was that it was maintaining production at 50-60 percent of 275,000-tonne per year capacity.
First-quarter production, only partly reflecting the impact of the Feb. 12 walk-out, slid to just over 50,000 tonnes from 73,000 tonnes in the previous quarter.
Second-quarter results are now pending but the ongoing loss of units is somewhere in the mix at New Orleans, which holds the only LME-registered zinc stocks in the United States.
There's more in the mix as well.
Everyone's watching China. As the world's largest processor of mined concentrates into refined zinc, the country is on the front-line of the tightening in the raw materials segment of the supply chain.
The collective betting is that it is only a matter of time before China's import demand heats up as domestic production fails to keep pace with demand.
That hasn't happened yet.
Refined zinc imports are running at subdued levels. Despite an acceleration in April and May, the cumulative year-to-date tally is 138,700 tonnes, down 46 percent on last year's levels and 2016 wasn't a bumper import year either.
That said, there are signs of stress in China's zinc market.
Stocks held in Shanghai Futures Exchange (ShFE) warehouses have, like the LME, been rapidly depleted since the start of the year.
Despite a small week-on-week bounce to 66,947 tonnes, the headline figure has fallen by 85,877 tonnes since January. The last time ShFE stocks were this low was all the way back in 2009, when the Shanghai zinc contract was still in its infancy.
National refined metal production was down by almost 10 percent in May with several large operators taking maintenance downtime.
Zinc concentrate imports have surprised on the upside with inbound flows up 25 percent so far this year.
That partly reflects strong imports from Peru (up 40 percent) but also higher imports from second-tier suppliers such as Russia (up 218 percent), Myanmar (up 149 percent) and Iran (up 55 percent).
The overall impression is of a smelter sector that is actively thrifting and simultaneously trying to tap new sources of supply.
Hoarding physical metal in anticipation of stronger Chinese zinc import demand is the other dimension of the LME stocks picture.
The zinc pendulum has swung from poor technicals to constructive fundamentals over the space of the last month and the funds are responding by getting back in on the long side.
There is still a lot of uncertainty out there as to the real state of play in the physical market and LME stock levels are only one component of the puzzle and an historically unreliable one at that.
But at current levels the London zinc market is starting to look like an increasingly tight space, particularly for short-position holders.
But there is one in particular, that one sitting on the July date, that merits attention. Its actions will determine the next swing of the funds-fundamentals pendulum.
Editing by Susan Thomas