Zinc market tightness confounds bearish expectations
London Metal Exchange zinc spreads are stressed, with the cash-to-three-months premium hitting a one-year high of $63 per tonne earlier this week.
LME stocks are low, at just 99,900 tonnes excluding metal earmarked for physical load-out.
It's the same story in Shanghai.
Physical tightness in the refined segment of the market, it seems, is not going to go away any time soon, either in Shanghai or in London.Shanghai Futures Exchange (ShFE) zinc spreads are also in backwardation, while the premium for metal in bonded warehouses shot to multi-year highs in September.
ShFE stocks have rebuilt slightly since the start of the month to 53,500 tonnes. But that's still well short of the 160,000 tonnes that were there as recently as April.
"Screamingly bullish" is how analysts at Citi described the Shanghai market earlier this month.
Not the sort of headline you'd expect in a market that is weighed down by expectations of a looming supply surge.
The feast, however, has been postponed, leaving the physical supply chain hungry for units.
ILZSG moves the goal-posts
The International Lead and Zinc Study Group (ILZSG) made some interesting revisions to its supply-demand forecasts in its October assessment of the zinc market.
The group increased its expected global supply deficit this year to 322,000 tonnes from the 263,000 tonnes forecast at its last meeting in April.
Trying to predict a market balance for an industrial metal such as zinc is a hapless exercise, particularly given the statistical opacity of China, the largest single influence on the calculations.
Environmental crackdown seems the most plausible explanation for the change in Chinese supply dynamics.
The deficit assessment is a function of many moveable inputs, some of them known, some of them "known unknowns".
The real takeaway is not the outright size of deficit but why the group has increased its shortfall estimate.
This year's expected mine production growth has been slashed to 2.0 percent from April's forecast of 5.1 percent.
China's own mine output is now forecast to contract by 2.5 percent this year. In April the ILZSG expected it to rise by 2.3 percent.
China's usual "swing capacity", the smaller operations that burst into life during periods of elevated pricing, has failed to swing this time around, even though the zinc price hit 11-year highs in the second quarter.
Outside of China, meanwhile, the wave of new mines is only starting to build.
That supply will hit the market next year, when the ILZSG is forecasting global mine production to surge by 6.4 percent with refined output growth accelerating from 1.4 percent to 3.0 percent.
Note, however, that the group is still expecting a small 72,000-tonne refined metal deficit next year, presumably allowing for the time it takes for higher mine output to travel down the production chain.
The supply surge, in other words, has been pushed back to 2019.
Physical tightness in the refined segment of the market, it seems, is not going to go away any time soon, either in Shanghai or in London.
In early September the premium for zinc in Shanghai's bonded warehouse zone nearly doubled to $300 per tonne over LME cash, according to Shanghai Metal Market.
Visible stocks on the ShFE were depleted at under 30,000 tonnes both at the start and end of September.
This squeeze on physical availability has coincided with a slide in China's own refined zinc production.
National output fell for a fourth straight month in September, the pace of decline quickening to 10 percent, according to the National Bureau of Statistics.
The official figures always come with a statistical health warning but the trend of falling refined production tallies both with the ILZSG's assessment of lower domestic mine supply and with Chinese producers' stated intention to cut output in the face of compressed margins.
The spike in the Shanghai premium may have included an element of panic buying ahead of the Golden Week national holiday but it's noticeable that the premium has fallen only as far as $200, matching its previous high in 2017.
It's still signalling that China is short of zinc units.
LME hall of mirrors
Those units will come from the rest of the world. Unfortunately, we don't know how much because China hasn't released detailed metals trade reports since March.
And we don't know how much there is to feed Chinese imports because most of the inventory in the rest of the world is sitting away from the statistical light in off-market storage.
What we do know is that a significant part of that inventory is located in Antwerp and New Orleans, because those are the two LME locations that have seen large amounts of zinc placed on to LME warrant this year.
Antwerp received 60,050 tonnes over a three-day period in April and another 19,100 tonnes on July 20.
New Orleans has seen sporadic inflows totalling 182,975 tonnes this year.
The appearance of so much zinc has played to the bear narrative. But in truth it is no more than a hall-of-mirrors interplay of LME spreads, LME warehouse economics and a good deal of warrant sifting as traders seek out saleable units from what might well be very old metal.
Which is why what has "arrived" at both Antwerp and New Orleans hasn't stuck around for long.
The Belgian location is currently being cleared out after a mass cancellation last week. There are 31,275 tonnes of zinc awaiting physical load-out and just 200 tonnes of available stock.
In New Orleans, despite the merry-go-round of zinc between on- and off-market storage, headline LME stocks are now down by 50,800 tonnes on the start of the year.
Outside of these two locations, inflow into the LME storage system has been a minimal 6,275 tonnes since January. Most of it has already departed.
Only two other locations now hold registered open tonnage – Rotterdam with 100 tonnes and Bilbao in Spain with 300 tonnes.
Appearances can be deceptive when it comes to LME stocks but the underlying reality is that outside of rotational movement at Antwerp and particularly New Orleans, there doesn't seem to be much metal available even at recent high cash premium levels.
The ILZSG's October forecasts tell us why that shouldn't be a big surprise.
Time-spreads in both London and Shanghai are a reality check on a bear narrative that had run ahead of itself.
(By Andy Home; Editing by Jan Harvey)