(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON, March 1 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
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:
THIS TIME IT'S DIFFERENT?
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
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
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
Graphic on China's net imports of refined zinc: 2009-2017
CANADIAN WILD CARD
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
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.
ALL EYES ON CHINA
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
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
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
The answer to those questions will hold the key as to when
the next chapter of this zinc story opens.
(Editing by David Clarke)