FOCUS: Narrower LME zinc-lead gap could mean old relationship is rekindled

A gap between the three-month prices of zinc and lead on the London Metal Exchange could generally narrow and become more settled in the coming weeks after an extended period of flux, market participants suggested.

The prices of zinc and lead have historically tended to trade in tandem on the LME but they have diverged to a greater degree over the past couple of years – global supply discrepancies and sharp stock movements have spurred volatility in both metals, making it harder to predict their direction with confidence.

The gap between them narrowed to a 2018 low of $544 per tonne on May 24 from its widest in a decade in February at $960.50 per tonne. At the close of trading on June 13 it was $731 per tonne.

The narrowing of the gap from that 10-year high reflects a comparatively bigger move in the zinc price, which has tumbled to around $3,200 per tonne from a 2018 high of $3,595.50 per tonne in February.

Over the same period, lead prices have traded in a smaller window of $250-300, falling to a low of $2,241 per tonne at the start of May before recovering to trade at $2,555 per tonne on June 7.

Steadier markets – and similar pressures across both – in lead and zinc could now re-establish the more typical relationship between the two.

“We all know zinc is coming to its end game after the big bull story last year. The question from a lot of people is whether we could be getting the last kick and squeeze, however,” Oliver Nugent, a commodities strategist at ING, told Metal Bulletin.

“The situation has unraveled quicker than expected, and it’s clear that zinc is now in a downtrend back to sub-$3,000 per tonne levels,” he added.

For zinc in particular, significant stock moves have coincided with the implementation of Section 232 tariffs by the United States on steel and aluminium imports of 25% and 10% respectively from the EU, Canada and Mexico.

The usage of zinc as a protective element for steel brings the US-imposed tariffs into sharper focus – 50% of zinc’s end use is in steel galvanization.

After the initial announcement of Section 232 on March 8, zinc’s three-month price rose more than 2% to trade just short of $3,300 per tonne.

“People are very wary of US trade sanctions. There’s a lot of zinc in New Orleans and, despite that metal being generally seen as off market, it is possible that now that trade sanctions are implemented that [this] metal may become more significant,” SP Angel analyst John Meyer told Metal Bulletin.

“Shipping is going to get more expensive with tariffs looming and potential trade flow interruptions. Consumers are likely to protect themselves, and that could feed through to increased stock levels. In addition, the potential for inflation and rising production costs could put pressure on both metals,” he added.

LME zinc and lead stocks have both fallen since this time last year – zinc inventories are down 25% at 245,650 tonnes while those of lead are down 26% at 133,475 tonnes. Still, zinc stocks are up 26% since the start of 2018, while lead stocks are down 6%.

Zinc’s on-warrant stocks have risen more than 6% in June to 227,250 tonnes while lead’s on-warrant levels are up more than 17% over the same period at 87,000 tonnes.

Available zinc stocks on the LME at 227,250 tonnes as of June 12 are at their highest since February 2017, which dovetails with a slack physical market – spot premiums on zinc ingots have dropped to seven-year lows in Europe and zinc concentrate treatment charges (TCs) reached their highest this year in May.

Zinc’s cash/three-month spread has swung to a backwardation of $38.25 per tonne from a contango of $3.00 per tonne late in May.

By contrast, lead’s cash/three-month spread was last in backwardation on May 22 at $1.15 per tonne and has since remained in contango – it is currently at $13.00 per tonne.

“I think zinc’s backwardation stems from three months ago when you had a lot of selling occur, taking zinc [prices] back down to $3,000 per tonne. In addition, dominant long positions in the market could be looking to squeeze the shorts, with a kind of battle between the two ensuing,” Robin Bhar, head of metals research at Socgen, told Metal Bulletin.

“From a fundamental viewpoint, a broad downtrend in zinc stocks, despite occasional upward spikes, has contributed to this emerging tightness. Whether it will be sustained or blow over, however, time will tell,” he added.