November 19, 2018 / 12:05 PM / 9 months ago

GRAPHIC-Fall of zinc stocks squeezes bears as LME contract expires

* LME zinc spreads surge before Wednesday’s contract expiry

* Expected rise in zinc supply fails to materialise

* Shortages eat into stocks, at lowest in a decade

By Eric Onstad

LONDON, Nov 19 (Reuters) - A slide in zinc inventories on the London Metal Exchange to their lowest in more than a decade has wrong-footed bearish investors who are scrambling to cover or roll over futures positions before the November contract expiry.

Many investors locked in short positions based on forecasts of rising supply, but an expected increase in production has not materialised. The November contract expires on Wednesday.

The International Lead and Zinc Study Group slashed its forecasts last month, revising the gain in global zinc mine output to 2 percent from an April estimate of a 5.1 percent.

“We definitely haven’t seen the upturn in refined output globally that many people were predicting six to 12 months ago,” said Ross Strachan, senior commodities economist at Capital Economics.

“Clearly some people had been expecting the market to be significantly looser by now and they’ve been caught out.”

Shortages of refined metal have eaten into inventories, with zinc stocks in warehouses certified by the LME sliding by half since August to 124,450 tonnes, the lowest level since May 2008.

Stocks on the Shanghai Futures Exchange have tumbled by 75 percent since late March.

Low inventory levels have supported LME zinc prices, which have recovered nearly 15 percent from a low of $2,283 a tonne hit in mid-August, closing at $2,607 on Friday.

But macro-economic worries that have weighed on financial markets have kept zinc prices lower than justified by the shortages, analysts said.

“Historically three-month zinc prices have averaged $3,000 when stocks are below 200,000 tonnes. If stocks fall below 100,000 tonnes, zinc prices have averaged $3,600,” Commodity Strategist Nicky Shiels at Scotiabank said in a note.

The tight supply situation has forced short investors who want to continue to wait for a surge in supply to pay a heavy price for rolling over their positions.

Investors with bearish LME futures positions in November can close out positions, roll over their positions to the next month, or deliver inventories before the expiry on Wednesday.

The squeeze has sent the premium of the November contract over the December futures CMZNX18-Z18 to $48 a tonne.

“Only once in the last decade has a front-month roll been tighter - October 2017 which expired at $50,” said analyst Oliver Nugent at Citi in London.

“We have already seen the pressure on shorts drive LME zinc open interest down 10 percent since the start of October,” he added in a note.

Reporting by Eric Onstad Editing by Edmund Blair

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