(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON, March 5 Zinc is on a bull charge.
On the London Metal Exchange (LME), three-month metal
took out resistance at $2,100 per tonne on Tuesday and
has since powered to a one-year high of $2,143.50.
The "Street" is in thrall to zinc's bull narrative, a
stand-out in an otherwise featureless base metals landscape.
That narrative has just been given the thumbs-up by one of
the market's most powerful players.
"The much anticipated tightening of zinc mine supply is
starting to materialise," was the headline on one of the slides
accompanying Glencore Xstrata's results.
The subsequent bullet points spell out the reasons for zinc
bulls to be cheerful:
"Metal deficit in 2013 for the first time in five years ...
Insufficient new mine supply to replace closures ... Chinese
mine supply will determine market fate ... upside surprises
Adding to the excitement is the steady ratcheting up of
tightness across the front part of the LME curve.
The benchmark cash-to-three-months period CMZN0-3 has in
the last few days flared out to levels of backwardation not seen
in years, closing Tuesday valued at $26.25 per tonne.
No wonder short position-holders are now scrambling to cover
or to escape the squeeze by rolling further along the curve.
Well, most of them at any rate.
Because one of the most interesting features of the current
LME zinc dynamic is the really large short position holding
steady station on the March prime date.
A COMPLICATED RELATIONSHIP
The front part of the LME zinc curve has been in and out of
backwardation since the middle of December.
There is no obvious reason for this.
The global market may have moved into supply deficit last
year but only after five years of surplus and associated stocks
LME stocks have been falling but at almost 752,000 tonnes
are still high in outright terms.
For sure, zinc has been caught up in the LME load-out queue
machinations with tonnages concentrated in problem locations
such as New Orleans, Detroit and Vlissingen. <0#MZNSTX-LOC>
But what should be the key criterion for availability, open
tonnage, looks relatively healthy at 576,400 tonnes.
Compare and contrast with the other two LME contracts
currently experiencing front-date tightness; tin and copper.
Tin stocks are historically low in outright terms and have
been for some time now. Copper stocks are evenly split between
cancelled and open tonnage. At 134,100 tonnes the latter is at a
level that in the past has been synonymous with cash-date
But then the relationship between zinc stocks and spreads
has always been more problematic.
That relationship, according to Leon Westgate, analyst at
Standard Bank London, "isn't quite as coherent as many of the
other base metals with regular periods of backwardation
occurring at varying stock levels." ("Commodities Daily", March
"Even looking at pinch point effects, zinc appears to have a
much more complicated relationship between inventory levels and
near-dated spreads than most if not all the other LME metals."
The LME zinc tightness, Westgate concludes, "looks to be
related to positioning" rather than non-availability of metal.
Which brings us back to that March short.
At 30-40 percent of market open interest (as of Monday's
close), it is a mega position, equivalent to between 518,000 and
It has been there for many weeks and, as this month's prime
prompt date of March 19 moves closer, shows no sign of shifting.
Indeed, the current structure of the nearby zinc curve
suggests it is other players holding closer-dated short
positions that are feeding the backwardation.
The cash-March 19 spread was valued at $14 backwardation on
Tuesday. March-April, which should be the most sensitive spread
to any movement out of this month's prompt date was, by
contrast, valued at "just" $5.5 backwardation.
Graphic on LME zinc curve structure:
Aligned against the March short are four sizeable long
position-holders, according to the LME's latest futures banding
Some sort of showdown looks increasingly likely, promising
what the LME "Street" likes to call "fun and games" and everyone
else would call a potentially bloody bust-up.
STAND AND DELIVER?
Unless, of course, that short has no intention of trying to
escape but rather is planning to physically deliver metal into
the LME system.
Something similar happened in January, which also saw spread
tension build in the early part of the month.
A total 57,025 tonnes of metal sitting in the load-out queue
at New Orleans was re-warranted either side of the January prime
That's one reason why open tonnage in the LME storage system
has steadily increased from 500,800 tonnes at the start of the
year even as headline stocks have fallen.
It's happening again right now. The stocks report on
Wednesday morning showed a net movement of 4,775 tonnes from the
cancelled to the open category.
But it is highly questionable as to whether the March short
is in the load-out queue, given its size relative to the reduced
amount of cancelled tonnage now in the system.
The potential seems to be there for a wholesale delivery of
metal that is sitting off-market back into the visibility of LME
THE MISSING LINK
Which touches on the missing link in the zinc bull story.
Where, exactly, has five years of cumulative surplus gone?
Some of it is there in those high LME stocks. But more of it
isn't. Has it gone to China, as some analysts argue? Or is it
still sitting gathering dust closer to an LME home, locked up in
a financing deal?
In this respect the LME queues have served only to deepen
Antwerp, for example, saw 156,400 tonnes of zinc warranted
in the space of a single month, October 2012. Registered tonnage
in the Belgian port peaked at 179,800 tonnes in February 2013,
by which time most of the metal had been cancelled to form a
Antwerp now holds just 3,750 tonnes of LME-registered zinc,
begging the question as to what happened to the rest of it.
We may be about to find out.
The LME zinc tightness appears to reinforce the bull
narrative driving this market higher. It may, though, turn out
to pose a major challenge to that narrative, if it acts to
remind everyone that five years of surplus stock hasn't
(Editing by David Evans)