FOCUS: Global on-exchange zinc stocks leap after largest LME delivery since 2013

The largest zinc delivery in nearly five years has swung zinc’s London Metal Exchange cash/three-month spread into contango for the first time in 2018.

Some 78,950 tonnes were delivered into LME-approved warehouses in New Orleans on Monday March 5 – the largest inflow since July 2013, increasing on-warrant stock levels by 94%.

And it is not just the LME which has seen stocks rising; Shanghai Futures Exchange zinc stocks rose 31% in the week to Friday March 3 because environmental restrictions have reduced demand from galvanizers.

“Exchange stock levels were worryingly low, although people were aware there was lots of zinc sitting off exchange. Now the flow is changing and it’s slowly coming back on exchange,” a trader said.

“But we do not know how long this change will last. There could be more deliveries, I hear the total may be 100,000 tonnes – so there is a little more to come,” he added.

Total LME zinc stocks are now back over 200,000 tonnes for the first time since late last year. While SHFE stocks climbed back above 100,000 tonnes in February for the first time in eight months.

“This move is clearly a guy trying to make a splash. Spreads have eased considerably, telling you metal is coming soon – there could be additional deliveries,” a second trader said.

“If another 70,000 tonnes comes in then the whole curve will completely collapse,” he added.

The cash/three-month spread has today swung back into contango, most recently trading at $0.75 per tonne contango from $6 per tonne backwardation at the close on Friday.

In February, the cash/three-month spread hit a high of $56 per tonne backwardation and was last in contango back in December 2017.

“I don’t think it’s a big surprise that there were merchants with quite concentrated positions and forming dominant positions according to LME data; that contributed to the tightening of the spreads and last week we saw spreads collapsing so it’s evident that something shifted in terms of the concentration of holdings,” Vivienne Lloyd, senior analyst at Macquarie, said.

“If the warrants are fee floated then it should now be in multiple hands – it should reduce the potential that everyone holds it can deliver. So that makes it harder to be mass canceled,” she added.

Yet one major warehouse operator believes the massive deliveries are not expected to stay on-warrant for more than two months because a large commodity house was delivering them onto LME sheds for better warehousing deals.

The warehousing source told Metal Bulletin all warrants will be canceled in two months’ time when negotiations on warehousing terms are complete.

Following the delivery, the LME three-month zinc price has dropped 2.5% so far – the weakest of the base metals complex.

Flushing out off-exchange stocks?
Some industry participants think that when the initial panic calms, the delivery could be supportive of zinc prices.

“If off-exchange stocks continue to fall then in the end, once the panic surrounding deliveries calms, it should be supportive for long-term prices. But that reaction takes a while to come to the forefront,” a source said.

Traders said that the delivery could be pushing off-exchange zinc stocks lower, which may tighten the market.

“I agree that it could be flushing out the off-exchange spares stocks - assuming the demand is there it may ultimately tighten the market,” an LME trader said.

“But I’m not sure if the higher prices will attract more production,” he added.

Dalton Barker in Chicago, and Archie Hunter and Julian Luk in London contributed to this article.

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