Zinc prices are climbing again, but the rally appears to be driven by tightening supply rather than a sudden jump in demand, according to Finimize. Traders are focusing on a shrinking pool of metal immediately available on the London Metal Exchange (LME). The LME cash zinc premium has risen to $106 a ton as available warehouse stocks fell and smelters faced tight concentrate supply.
Reuters reported that weaker mine output has pushed smelters' treatment charges, the fees miners pay smelters to turn ore into metal, to record lows. This has prompted cuts in refined zinc production. The tightness is most visible in the LME's cash-to-three-month spread.
The cash contract, which covers immediate delivery, is now priced $106 a ton above the three-month contract, up from $45 the previous week. A higher near-term price is a sign that buyers are scrambling for prompt supply. Total LME zinc inventories may look healthier, but Reuters noted more withdrawal requests and a 14% fall in available warehouse stocks within a single week.
Finimize points out that the deliverable pool is therefore shrinking faster than the headline inventory figure suggests. Sucden Financial, a UK commodities broker, warned that if concentrate supply does not improve, Chinese refined output may not ramp up quickly enough to ease shortages outside China. Chinese exports helped earlier this year, but it is not clear that this flow will repeat.
For market participants, the cash premium turns hedging into a carry cost. Anyone hedging with short positions, or rolling a hedge forward, may have to pay more each time they move from the cash contract into a later one. Finimize also highlights a potential feedback loop: if holding metal on the exchange becomes more valuable, owners may cancel warrants and withdraw metal from the deliverable system or move it between warehouses, tightening prompt supply further.
The likely result is larger and faster swings in the cash-to-three-month spread, along with higher near-term hedging costs for zinc users and traders outside China, including supply chains linked to galvanizing steel. Source: Finimize, citing Reuters and Sucden Financial.
Source: finimize.com