(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, March 1 (Reuters) - The next chapter of zinc's bull market story has just opened with a mass raid on metal sitting in London Metal Exchange (LME) warehouses.
More than 100,000 tonnes of exchange stocks have been cancelled in the space of a couple of weeks, meaning the metal is no longer available for trading purposes and can be physically loaded out of warehouses.
The remaining "open" tonnage, as it's termed on the LME, has now fallen to 203,350 tonnes, the lowest since December 2008.
This can be seen as another sign that tightness in the zinc raw materials market is starting to feed through into the refined metal part of the supply chain.
That's good news for the many zinc bulls out there, who have already seen the price of London zinc rise from under $1,600 per tonne to $2,860 over the last year.
There are two key questions that need to be answered, though, if the price is to rise further.
Is this slump in available LME stocks for real or just another false signal emanating from the smoke-and-mirrors financing trade?
And when will this evolving bull story start affecting China, the world's biggest producer and consumer of zinc?
Graphic on LME zinc stocks: 2007-2017:
Most of the cancellation activity has taken place at New Orleans. This should come as no big surprise since the U.S. port has long held the lion's share of LME zinc stocks.
Total LME-registered inventory in New Orleans currently stands at 340,400 tonnes, or 89 percent of the global total, of which just over half is now sitting in the cancelled metal "departure lounge". <0#MZNSTX-LOC>
This, however, is not the first time New Orleans has seen mass cancellations of zinc.
Back in 2013 the ratio of cancelled tonnage to open tonnage in the port spiked to over 65 percent but subsequent drawdowns proved a false signal as large amounts of the metal miraculously reappeared in the system over the ensuing months.
The zinc was essentially on a merry-go-round between exchange and non-exchange storage, with stocks financiers looking to lower their costs by moving the metal to cheaper non-LME registered sheds.
There are two big differences between now and then, though.
First, there were more than 800,000 tonnes of zinc in LME warehouses at the start of 2013. Today the figure is half that.
Second, and more importantly, the market structure is very different.
The front part of the LME zinc curve was in persistent contango over the course of 2013 with three-month metal trading at a premium of about $30-40 per tonne over LME cash prices.
That's the sort of market structure that stocks financiers love since the return from the contango covers their costs, which are largely related to storing the metal during the financing term.
But the LME's benchmark cash-to-three-month spread CMZN0-3 hasn't seen that wide a contango since. Rather, the spread has been increasingly prone to flip the other way into backwardation, most recently last month, when cash commanded a premium of $6.75 per tonne over three-month metal.
No money to be made there for any would-be financiers.
That's not to say that there isn't still zinc sitting in the statistical off-exchange shadows in New Orleans. Indeed, the recent tightening of the LME spreads sucked in 24,700 tonnes over the course of February.
But without any financing incentive driven by the spreads, the inference is that this recent bout of mass cancellations represents a metal grab by those looking to build strategic physical positions, similar to that seen in the LME lead market in January.
Graphic on China's net imports of refined zinc: 2009-2017
One wild-card in the North American zinc stocks equation, though, comes in the form of the strike at the CEZ zinc refinery in Canada, now in its third week.
Refinery owner Noranda Income Fund said at the start of the walk-out it would try and maintain limited production at the 275,000 tonne per year facility.
It has just released fourth-quarter results, confirming that it has "resumed partial production with staff operating the facility", and noting it is still "evaluating its production capacity under this scenario".
Might this be a factor in the LME cancellation activity? It's possible, although the company also said it "has attempted to minimise the impact on customers by shipping inventory and new production".
Moreover, the scale of LME cancellations dwarfs the likely loss of metal at CEZ, unless the company is anticipating a really long strike.
That leaves physical hoarding in anticipation of a steadily tightening refined metal market the most likely explanation for the LME stocks raid.
One bit of the anticipated zinc bull story, however, has so far failed to fall into place, namely China.
China has historically been a major importer of zinc concentrates to top up domestic supply to its smelters.
It should in theory be feeling the raw materials pinch, particularly since concentrates imports slumped 49 percent last year and were down again in January to the tune of 7 percent.
Yet there has been no discernible impact on refined metal availability in the country.
Stocks registered with the Shanghai Futures Exchange stand at 197,895 tonnes, roughly in the middle of the last year's range.
And imports of refined zinc remain highly subdued.
Net imports actually fell last year by almost 10 percent to 403,000 tonnes and January's readout of 16,000 tonnes was the lowest since September of last year.
The assumption among analysts is that smelters are running down concentrates stocks accumulated during the years of abundant supply.
But how long can they continue doing so? And how long before the country steps up its call on metal from the rest of the world?
The answer to those questions will hold the key as to when the next chapter of this zinc story opens. (Editing by David Clarke)