A pile-up of hidden zinc stocks in Spain has helped create shortages in top consumer China and bolstered a price rally, despite expectations of surpluses this year for the metal used to galvanise steel.
Stocks not held in exchange warehouses have climbed in several countries, but the stand out is Spain where a major smelting operation is located, analysts and traders said.
The San Juan de Nieva smelter in Spain, one of the largest in the world, is owned by commodities trading and mining group Glencore, which declined to comment on whether it was piling up zinc.
“Glencore’s aim in holding stock back from the market would be to support the physical market, support physical premiums,” said a trading source.
“More importantly, it keeps metal away from London Metal Exchange (registered) warehouses where it would be visible.”
Benchmark zinc has been the best performer on the London Metal Exchange (LME) since the start of October, rallying about 18% compared with 11% for copper, touching an 18-month peak.
The latest Reuters survey of analysts shows that the zinc market is forecast to see a surplus 257,500 tonnes this year.
“You’ve got pretty clear evidence of stock builds of zinc at producer locations rather than on exchange,” according to analyst Oliver Nugent at Citi.
The sharp drop in refined zinc exports from Spain this year showed the extent of inventory building up there, Nugent added.
In the first seven months of 2020, exports slid 41% to 161,603 tonnes, data from the International Lead and Zinc Study Group show.
The shortfall of 111,100 tonnes is nearly half of the expected global surplus.
China, the world’s biggest consumer of zinc, has seen a decline in refined zinc imports this year.
The combination of lower supply and rising demand due to Chinese stimulus has created tightness and pushed up bonded warehouses zinc premiums in China to a one-year high of $105 a tonne.
The shortages, however, could ease, Nugent said.
“High ex-China producer stocks if unwound could significantly weaken physical markets, but our base case is that they will be held back for some time.”
(By Eric Onstad; Editing by Pratima Desai and Louise Heavens)