Supply, high LME prices weigh on zinc premiums in Asia

Zinc premiums in Johor have fallen amid availability of material and backwardation in London Metal Exchange prices, market participants said.

In-warehouse Johor premiums have fallen to $130 per tonne, a trader in Singapore said. Premiums were at $165-170 last week.

In Singapore, premiums were about $150 per tonne, another trader said. Premiums fell to $150-160 towards the latter end of last week, from $170-180 earlier.

Material from Europe and the USA is bringing premiums down, the trader said.

Physical traders are looking to pick up warrants in New Orleans following the effective disappearance of the queues to withdraw metal from LME warehouses at the Louisiana port, as Metal Bulletin reported this month.

The trader also cited the backwardation in the market as a reason for the retreat.

On the LME, zinc has been in backwardation consistently since July 23, with the spread at $9 on July 30. Between July 1 and July 30 the metal was in backwardation on 10 days.

The spread has risen from $6 on July 23.   

One of the traders noted that the backwardation was driving people to get rid of material.

“In-warehouse Johor could be about $125 per tonne,” a trader in Singapore said, also citing the spread as the reason for the fall.
 
A third trader assessed premiums in Johor as being about $140-150 per tonne, adding he “wasn’t surprised that premiums as low as $130 were also heard in the market as a lot of material is sitting around”.

“Around two-and-half weeks ago we did a deal for 100 tonnes at $160,” he said.

“Demand for zinc linked to financing deals has come off after the Qingdao scandal,” a fourth trader in Singapore said.

Most market participants said the recent LME zinc prices were overblown.

“Speculation has been driving zinc prices higher,” one of the traders said, echoing the views of the other market participants questioned by Metal Bulletin.
 
“With the upswing since May, profit-taking has already started,” a broker said.

“The high zinc prices are definitely not fundamentals-driven and the initial thrust came from Chinese hedge funds,” he added.

On the Shanghai Futures Exchange, open interest in zinc has risen consistently over the past three months from 161,652 lots in May, to 312,900 lots in June and reached 504,122 lots in July.

“Metal prices began to decline yesterday ahead of the EU’s economic sanctions against Russia,” Commerzbank analysts wrote in a note on July 30.

Deepali Sharma
deepali.sharma@metalbulletinasia.com