* LME zinc stocks fall by nearly 200,000 tonnes since Dec
* Financiers move stocks into "hidden" off-exchange depots
* Some metal also shifting among warehouse owner rivals
By Eric Onstad
LONDON, May 13 A rush to lock in financing deals
for zinc while they are still profitable has been the main
driver behind a recent fall in inventories and will keep
premiums high for industrial users, industry sources said.
Stockpiles of zinc in warehouses monitored by the London
Metal Exchange have slid by 197,775 tonnes or 16
percent since early December, while inventories on the Shanghai
Futures Exchange have declined 9 percent.
The erosion of stocks from near-record peaks in December,
which has surprised many investors, comes a time that supply is
outstripping demand. This year's market surplus is estimated to
reach 273,000 tonnes, according to the International Lead and
Zinc Study Group.
Sharp falls in metal inventories are usually signs of strong
surges in demand as consumers hunt for supplies.
But only a fraction the zinc coming out of warehouses is
going into manufacturing, analysts and traders said. Smelting is
declining due to weak margins as demand is modest from
consumers, mainly companies that use it to galvanise steel,
industry sources said.
Most of it is involved in financing deals, in which banks
and investors store metal in warehouses to take advantage of low
interest rates and a market that is in contango, with prices
higher for forward contracts than for spot contracts.
Furthermore, non-LME warehouses are competing to attract
stocks by offering lower storage fees.
"You've got the opportunistic financiers who are looking for
the lowest rents," said a London trader who specialises in LME
inventories. "It's being moved into alternative facilities that
have a lower cost of rent, and then it becomes invisible."
Rentals for zinc at LME-registered warehouses are 43-45
cents per day per tonne, but rentals can be negotiated at
non-LME depots for 10 cents or less, the London trader added.
JUMPING ON THE CONTANGO
The benchmark three-month LME zinc price has slid by
17 percent from a peak in mid-February to around $1,860 a tonne.
However, zinc futures for this time next year trade higher
at about $1,920. Investors are keen to lock in financing deals
while the zinc forward curve is still steep enough to turn a
decent profit and interest rates are still low.
"I've got the feeling that there are people looking at the
imminent end of very low interest rates and flattening curves
going forward," said Wiktor Bielski, head of commodities
research at VTB Capital in London. "So, if you're going to do
contango financing deals, you'd better start doing them soon,
because the timeframe is probably shrinking."
Analysts say that some zinc is probably shifting from one
warehouse operator to another due to competition to secure
lucrative rents and also to maintain high physical premiums.
The biggest decline has been at LME warehouses in New
Orleans, where most metal is stored in facilities owned by a
unit of investment bank Goldman Sachs and a unit of
commodities group Glencore Xstrata.
Other major stock declines have been in Antwerp and Johor,
where most of the LME facilities are controlled by a subsidiary
of commodity trader Trafigura.
RISE AT GLENCORE DUTCH WAREHOUSES
While the overall direction in stocks has been down, LME
zinc stocks have quadrupled since late February in the Dutch
port of Vlissingen , a stronghold of Glencore's
warehousing unit Pacorini.
Glencore, a major zinc producer, has been tightening its
grip on the global market since last year, moving zinc to
inaccessible warehouse locations and forcing industrial users to
pay high premiums to get physical delivery of a metal in
"That (stock movements) gives them an opportunity to start a
separate short queue (at Vlissingen)," another London trader
Zinc, like aluminium, has been hit by long backlogs at LME
warehouses due to LME rules that allow warehouse operators to
release much less material per day than they take in. The lack
of readily available metal has boosted premiums - the amount
paid over the LME cash price for physical metal.
In Europe, zinc premiums have been rising steadily this year
to around $140-150 per tonne for zinc in Rotterdam from $120-130
in January. Traders said this has been partly due to the
material being sucked into backlogged warehouses such as
Vlissingen and the financing deals.
Analysts said consumer demand may account for some of the
drawdowns from Asian LME warehouses such as Johor.