LME zinc turns wild after bears sleep-walk into squeeze
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By JamesOctober 22, 20254 Mins Read
LONDON, Oct 22 (Reuters) – The London Metal Exchange zinc contract has taken a walk on the wild side this week with time-spreads flaring out to record levels against a backdrop of depleted exchange stocks.
The zinc market has been sleep-walking towards this storm for several months, confident that falling LME inventory wasn’t a true reflection of a market in growing supply surplus.
Yet metal has continued flowing out of LME warehouses, leaving just 35,300 metric tons, barely enough to cover one day’s worth of global consumption. Arrivals have been minimal despite the widening premium for cash delivery.
The result is a ferocious squeeze as bears pay the painful price of mistiming zinc’s shifting dynamics.
LME registered and off-warrant zinc stocks
SINGAPORE SLING
This time last year there were 300,000 tons of zinc sitting in LME warehouses, most of it in Singapore, where warehouse operators were engaged in fierce competition for storage revenue.
There was huge stocks churn over the course of 2024 as metal was pushed and pulled by warehouse incentives, often in the form of rent-sharing deals with trade houses. Almost 700,000 tons of zinc moved in and out of Singapore warehouses last year but the net change in inventory was a small 35,550-ton rise.
Something, however, changed around the start of this year. Zinc was leaving LME registered stocks but not appearing in the off-warrant shadows ready for renewed warranting at a different warehouse.
Rather, Singapore’s trade data show rising exports of refined zinc to destinations as far afield as Djibouti in east Africa and Guatemala in central America.
Since the city doesn’t have any zinc smelters or refineries, it’s a fair bet that what has left LME stocks has been slung out to the rest of the world.
Singapore SHG zinc exports by destination in 2025
SMELTERS POWER DOWN
So how come the rest of the world is short of a metal that is supposed to be in supply surplus?
The clues lie within the latest biannual statistical update from the International Lead and Zinc Study Group.
While zinc demand growth is flat-lining and mine supply is booming again after two years of contraction, Western smelters have been powering down or closing altogether.
ILZSG expects global metal output to rise by 2.7% this year but this is all down to China, where refined zinc production is on course to surge by 6.2%.
Quite evidently, production outside of China has been falling as smelters reduce run rates or, in the case of Toho Zinc’s (5707.T) Annaka smelter in Japan and Glencore’s (GLEN.L)secondary zinc operations in Italy, close completely.
The result is that this year’s projected supply surplus is a relatively modest 85,000 tons and it’s all in China.
LME cash-to-three-months zinc spread
SURPLUS TOMORROW, PAIN TODAY
Given the regional imbalance in availability, it’s no surprise that the London premium over the Shanghai Futures Exchange zinc price has been widening.
Chinese exports to LME warehouses are the most obvious way of reconciling the disconnect with the market outside of China.
The bad news for LME short position holders is that physical arbitrage takes time and they need metal today.
Which is why the cash premium over three-month metal has exploded to over $300 per ton, the tightest market conditions since the launch of the LME special high grade contract in the late 1980s.
There is no single dominant long but rather six of them holding cumulative cash positions amounting to over three times available stocks.
The tension with short position holders is clear to see in the so-called “tom-next” spread. The cost of rolling a short position overnight has been as high as $30 per ton this week.
There will be more pain until stocks rebuild in a meaningful way.
Surplus is coming. ILZSG forecasts a massive production excess of 271,000 tons in 2026.
But it’s not here now. Or certainly not where LME short position-holders need it to be.
Andy Home is a Reuters columnist. The opinions expressed are his own. |
