Battle for zinc price accelerates, bears target June downside with big option bets

Zinc bears are betting that the London Metal Exchange zinc price will fall to $2,500 per tonne in June, with massive orders for put options placed in recent weeks, Fastmarkets learned.

Current open interest on the LME Select platform shows 5,125 lots of put options are active for the June declaration at a $2,500-per-tonne strike price, representing an equivalent of 128,125 tonnes of the metal. Options give the right to buy via ‘calls’ or sell via ‘puts’ at a certain strike-price level.

The options trades, which would need an 11.6% drop in LME cash prices from the current level at $2,830 per tonne to activate, come at a time when the zinc market is approaching a turning point in terms of physical supply and demand as well as record tightness in forward price spreads.

“There’s been a big move in the options space over the last few weeks, at the end of March we saw this sudden repricing where the puts gained a lot,” Bank of America Merrill Lynch metals strategist Michael Widmer told Fastmarkets.

“That’s reflective of the market preparing for downside, we haven’t seen anything similar in scale and direction on the other base metals,” Widmer said.

China’s smelters to increase output
The metal’s major bull run from 2016 to 2018 came to an end when several major mines such as MMG’s Dugald River, Vedanta’s Gamsberg and the New Century tailings project started initial production.

But after hitting a two-year low of $2,263 per tonne in August 2018, zinc has rallied and is second only to nickel as the top performing metal on the LME this year. The LME zinc price is up 13% in the year to date from $2,462 per tonne on January 2 despite expectations that a fall is imminent.

The metal traded at over $3,050 per tonne on April 15, with Chinese domestic production down 5.1% in the first quarter, according to the National Bureau of Statistics.

This indicates that smelters are yet to convert additional mine supply into refined metal, Fastmarkets metals analyst James Moore said.

“Chinese imports are still down and the treatment charges in the international market haven’t really moved much, that says smelters [in China] are still sitting on the sidelines,” Moore said.

Low smelter production comes in the face of zinc concentrate treatment charges (TCs) being at over four-year highs and with free-metal prices encouraging refined production.

Fastmarkets assessed the spot market TCs for zinc concentrate, cif Asia Pacific, at $260-290 per tonne on April 26, down from a peak of over $300 per tonne in March.

“The question is to what extent concentrate availability will lead to increased refined production and then into loosening the physical [refined] market. I think that it’s happening now and means you’re more likely to see the zinc price’s downside in the second half of the year,” BOAML’s Widmer said.

Major Chinese zinc producer Hanzhong Smelter has restarted half of an operation line that was halted last year, which is expected to bring an additional 4,000 tonnes of metal back into production in April, a trend taking place across the country.

Outperforming on the upside

Chinese output figures for April are yet to be released so, short term, the zinc price can find support from a potential deal between China and the United States to end an ongoing trade dispute from last year, Commerzbank analyst Daniel Briezman said.

The world’s two biggest economies will continue the talks next week, with US Treasury Secretary Steven Mnuchin describing the talks as “productive” on May 1.

Germany’s Commerzbank forecasts a second-quarter zinc price of $2,850 per tonne, however, the zinc price forecast for the last quarter of 2019 is $2,700 per tonne, down by almost 5% from the $2,827-per-tonne LME zinc cash price on May 2.

With at least 70% of all LME warrant holdings controlled by just two members according to exchange data, there could be fireworks in price moves in June.

“There’s a battle between bulls and bears for dominance. If bears do get squeezed there could be a bit of a rush to cover as we get closer to the prompt date,” Fastmarkets’ James Moore said.

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