Foreign media reported on October 19 that since the beginning of this year, zinc is the second worst performing variety of base metals on the London Metal Exchange (LME).
Zinc for three-month delivery on the LME is trading at about $2,450 a tonne, down 18% from the start of the year. Only the dysfunctional nickel contract has fared worse.
Zinc's relatively poor performance is due to a build-up of metal overages as the global market shifts from a supply shortage to a widening glut.
The statistical committee of the International Lead and Zinc Research Group (ILZSG) met earlier this month and reversed an April assessment that the market would see a small supply deficit of 45,000 tonnes this year.
The agency now believes that the supply of zinc will greatly exceed the use of 248,000 tons, and the surplus will increase to 367,000 tons by 2024.
LME copper stocks, meanwhile, stood at 80,325 tonnes, the lowest since July. The disconnect between prices and inventories is a sign that equity financiers are back.
Shift to surplus
The zinc market has shifted to oversupply after two years of supply shortages due to lower-than-expected demand and higher-than-expected production.
The ILZSG has lowered its global electricity consumption forecasts since its last meeting in April. The growth forecast for 2023 was cut from 2.1% to 1.1%, with Europe being the biggest spot of weakness.
Zinc demand in Europe is expected to contract by 1.8 per cent this year due to a slowdown in construction activity, which accounts for about half of zinc demand in the form of galvanised steel.
Zinc production in Europe has also fallen as high energy costs have reduced smelter profitability. Refined metal production in the region fell 11.6 percent last year and is expected to fall another 2.6 percent this year, according to ILZSG.
Any impact on supply has been offset by particularly strong run rates at Chinese smelters, which have absorbed excess concentrate this year.
China's national refined zinc production is expected to grow 6.7 per cent this year and another 4.1 per cent next year, with global output rising 3.7 per cent and 3.3 per cent, respectively.
Even allowing for a return to 2.5% usage growth in 2024, the surge in smelter output would far outstrip demand, creating a massive surplus for two years.
Now you see...
The market got a glimpse of the excess metal in August. The London Metal Exchange (LME) has a total of 90,825 tonnes of warrants, taking the overall inventory figure to an 18-month high of 153,975 tonnes at the end of the month.
But much of the cargo that arrived in August was quickly snapped up and cancelled in preparation for the actual shipment from the LME warehouse system.
Overall inventories have fallen back to July levels, with 29,550 tonnes (37 per cent of the total) still sitting in lounges where warrants have been cancelled.
Where did all that money go?
Some may head to China, which has re-emerged as a net importer of refined zinc after a rare net export in 2022.
However, some of that money appears to be finding its way into over-the-counter financing deals with Citi, which is believed to have bought large amounts of zinc and aluminium.
Financing trades are premised on a contango between the near and forward months that is large enough to cover the cost of storage and make a profit by holding gold over the life of the trade.
In August, the spread between benchmark spot and three-month delivery on the London Metal Exchange (LME) swung to more than $30 a tonne contango, the biggest cash discount since early 2021.
The profitability of the industry also depends on storage costs. Authorised storage costs on the London Metal Exchange can be very high, which is why zinc disappears into the shadows under bespoke over-the-counter lease agreements.
Hidden surplus
There have been such equity raisings in the zinc market before, most recently at the end of the last century, when the LME's warehouse in New Orleans was the centre of trading.
There is no US zinc registered on the lme and most of it is in exchange storage systems in Singapore and Port Klang, Malaysia.
But if the past is any guide, expect a period of volatility in spreads as financiers periodically squeeze cash dates, forcing owners to release more metal to them.
The pattern of mass departures following recent increases in shares is also likely to become a recurring theme as financiers seek cheaper over-the-counter leasing deals.
The underlying reality, however, is that financing trades only make sense if there is too much metal, not too little, no matter what signals the stocks on the exchange seem to be sending.
