Andy Home: Zinc ROI-LME turns wild when bears sleep-walk and squeeze into the squeeze:
London Metal Exchange's zinc contract is on a wild ride this week, with time-spreads reaching record levels in the face of depleted stock.
Since several months the zinc market has been sleeping-walking to this storm, believing that falling LME inventories were not a true representation of a growing market surplus.
Metal has been leaking out of LME's warehouses. There are only 35,300 tons left, which is barely enough for a day's global consumption. The arrivals have been very low despite the increasing premium for cash deliveries.
It's a painful squeeze for the bears who misjudged zinc's changing dynamics.
SINGAPORE SLING
Last year, there were 300.000 tons of zinc in LME storage warehouses. Most of them were in Singapore where the warehouse operators were in a fierce competition to earn storage revenues.
Over the course of 2024, there was an enormous amount of metal movement as warehouse incentives were pushed and retracted. These deals often took the form of rental-sharing agreements with trade houses. Last year, almost 700,000 tonnes of zinc were moved into and out of Singapore's warehouses, but the inventory change was only a modest 35,550 tons.
Nevertheless, something changed at the beginning of this year. Zinc left LME registered stock but did not appear in the shadows of off-warrant ready for renewal warranting at another warehouse.
Singapore's trade statistics show that refined zinc exports are increasing to destinations such as Djibouti, in east Africa, and Guatemala, in central America.
It's safe to assume that the LME stock has been sold around the globe, since the city has no zinc refineries or smelters.
SMELTERS POWER DOWN
How is it that the rest of world is in short supply of a metal which is supposed to have a surplus of supply?
The latest biannual statistics update by the International Lead and Zinc Study Group provides some clues.
Western smelters are closing or reducing production as the zinc demand is stagnant and mine supplies are booming after two years in contraction.
ILZSG predicts that global metal production will rise by 2.7% in this year, but the main contributor to this increase is China. Its refined zinc production will surge by 6.2%.
It is clear that production outside China has fallen as smelters have reduced run rates, or in the case Toho Zinc’s Annaka smelter, located in Japan, and Glencore’s secondary zinc operations, located in Italy, completely closed.
This year, the projected surplus supply is only 85,000 tons. It's all from China.
SURPLUS TOMORROW - PAIN TODAY
It's not surprising that London has a higher zinc price than the Shanghai Futures Exchange, given the regional disparity in supply.
The most obvious solution to the disconnect between the Chinese market and the rest of the world is by importing Chinese products into LME warehouses.
Unfortunately, physical arbitrage is a slow process and LME short positions holders need metal now.
Why is there a cash premium on three-month metal?
The six dominant longs have cumulative cash positions of over three times the available stock.
In the "tom next" spread, it is easy to see that there are tensions between short position holders. This week, the cost of rolling over a short position was as high as 30 dollars per ton.
Stocks will continue to suffer until they are rebuilt in a meaningful manner.
Surplus is on its way. ILZSG predicts a massive excess production of 271,000 tonnes in 2026.
It's just not there. Or at least not where the holders of LME short positions need it.
Andy Home is an author and columnist. Andy Home is a columnist.
(source: Reuters)
