London Metal Exchange (LME) zinc stocks have more than doubled to 145,975 metric tonnes in the past month and are now at their highest level since February 2022.
What started in July as a trickle of metal in the market of last resort turned into a flood in August, with 76,425 metric tonnes placed on the LME mandate since the start of last week.
The sudden appearance of such an amount of zinc should not come as a big surprise since the market has been signaling weaker momentum for the galvanizing metal for some time.
The LME’s three-month zinc in May hit its lowest level in nearly three years, at $2,215 per metric ton. Currently trading around $2,280, zinc is down 24% since the start of January, making it the second worst performing base metal in the LME, after nickel.
Time spreads eased significantly around mid-April, suggesting the metal was accumulating off-exchange.
This month’s mini-squeeze brought some of that metal out of the shadows and there may be more in the future.
However, further up the supply chain, there are already signs that the collapse in the price of zinc is beginning to limit production.
THE CRISIS BRINGS OUT THE HIDDEN METAL
The trigger for the current wave of arrivals in the LME warehousing system appears to have been a sharp contraction in short-term weather spreads at the start of the month.
After moving in a comfortable contango since mid-April, the benchmark cash-to-three-month spread tipped into backwardation at the beginning of August. The spot premium hit $36.50 per metric ton on Aug. 9, the tightest stretch since February.
This mini-squeeze was awarded to Citibank which purchased the metal for a lucrative warehouse lease, the type of storage that has not been possible due to low availability for the past two years.
If so, the game is on in Singapore, which is the source of all recent arrivals over 1,000 metric tonnes at Malaysia’s Port Klang.
The harbinger that the metal was on its way to the LME warehouses came in the form of two waves of arrivals in Singapore last month.
A total of 31,500 tonnes of zinc were found in the city in July, along with 5,125 tonnes of lead and 625 tonnes of tin.
Monthly LME Queue data shows warehouses run by PGS (East Asia) Pte Ltd received 31,450 metric tonnes of metal last month, implying it was the main destination for zinc.
We have to wait for the next monthly LME update to confirm that the same warehousing company also received this month’s influx.
THE SURPLUS HAS ARRIVED
Low LME inventories seemed increasingly incongruous given the price move and mounting evidence that the zinc market had moved into a sizable oversupply.
The International Lead and Zinc Study Group (ILZSG) still predicted a global deficit of 45,000 tonnes of refined metal in April.
However, according to the group’s latest assessment, supply exceeded demand by 267,000 metric tonnes in the first five months of 2023.
He estimates that global production of refined metals rose 2.3% year-on-year, largely reflecting higher Chinese production.
Utilization growth, however, has remained at a much slower rate of 1.0% over the same period and it is possible that even this modest rate will decline further, given that zinc demand is sector driven. construction, which is weak both in China and in Europe.
The move towards market surplus has now taken tangible form, even if it took some LME timing play to bring it out of the shadow of off-market storage.
It remains to be seen how much additional zinc will make it into the LME system. The return of contango to the front of the zinc curve suggests that the immediate metal grab is over.
LOW PRICES ARE HAKING
Smelters around the world are still feasting on concentrates accumulated from last year, when outages in Europe and China created a bottleneck in the supply chain.
While part of European capacity remains out of service, Chinese production has rebounded strongly this year.
However, mining supply is shrinking, according to the ILZSG, which estimates that it fell 1.0% year-on-year between January and May.
Low prices are beginning to affect marginal producers, with Boliden’s closure of its Tara mine in Ireland being the most high-profile casualty to date.
The zinc supply cycle is showing the first signs of inflection, but it will take time before mining supply is tight enough to translate into lower refined metal production.
In the meantime, there is a lot of potential for more metal to flow into the LME storage warehouses. This month’s spread rental game is unlikely to be the last.
The opinions expressed here are those of the author, columnist for Reuters.
