London 25/08/2016 - The tightening of the nearby LME zinc spreads could bring more of the metal onto the exchange, market participants told FastMarkets.
The benchmark cash/threes was last at $5.75 backwardation, having been at $7.25 contango last week. Meanwhile, cash/Sept was at $8, cash/Oct $6.65 and cash/Nov $1.10.
Should tightness persist or grow, it could prove a headache for shorts that need to roll positions, with metal owners poised to take advantage.
According to LME warrant holding data, there is one cash position at 50-79 percent while warrant holdings and warrant holdings 'Tom' are at 40-49 percent.
In forward bandings data, there is one large short position in September at more than 40 percent.
"I have not seen anything concrete but there seems to be a lot of trade business enquires of adjusting to dates within the early part of the spread," an LME trader said.
"I hear that it is a bit 'engineered'. The refined market is not tight - I wouldn't be surprised if this nearby squeeze causes some financing deals to not be extended, and therefore deliveries against shorts," a second trader added.
Of inventories of 455,075 tonnes of metal, 26,150 tonnes are cancelled, leaving 428,925 tonnes of available material.
There is no shortage of metal, traders said - several hundred thousand tonnes are stored off-warrant in Asia and the US, it is thought.
"There are some big people behind the off-warrant stocks. Concentrates are tight but for refined there is no demand," a warrant trader said, adding a US bank with deep pockets is likely to be behind any squeeze.
"Zinc makes me suspicious as there is a lot of metal held in Johor and New Orleans. If you keep rattling the cage then someone could dump that in," he said.
Should that prove to be the case, it could take some of the wind out of the metal's recent price spike.
Zinc has been one of the outperformers this year, rising more than 40 percent from lows of $1,444 in January. It was last up $16 on Wednesday's close at $2,292 per tonne although it is off the August and year-to-date high of $2,314.
The metal has become something of a darling for analysts too thanks to production cuts and expectations that a long-awaited deficit is finally emerging.
According to ILZSG figures, there was a supply deficit of 138,000 tonnes in the first six months of this year, following a 194,000-tonne surplus in the first half of 2015.
The deficit is due almost solely to a marked fall in production since demand grew only slightly, Commerzbank noted.
Indeed, Chinese refined zinc imports almost halved to 16,000 tonnes last month, recent data from the key consuming nation shows, highlighting the absence of ingot tightness there. But, conversely, Chinese zinc ore and concentrate imports rose 76.4 percent month-on-month to 164,791 tonnes in July, taking year-to-date imports to 1.16 million tonnes.
"Tightness, as far as I can tell, is to do with mine supply," Sucden analyst Kash Kamal said. "There is nothing of significance in terms of tonnage capacity coming online in the near future. Capex across the board has been ridiculously weak. Cost-cutting has dominated this year so far so [it has been] a supply-driven rally rather than a demand-driven one."
Glencore reacted quickly and swiftly to zinc's price slump, cutting 500,000 tonnes per year of capacity. The miner-trader gave no clues about when it will resume zinc mining at its mothballed projects while delaying the restart of the bulk of its African mining copper operations.
Responding to questions about the timing of restarts, CEO Ivan Glasenberg said the company would only do so when it felt the time was right.
Still, the shuttered Glencore capacity hangs over the marketplace, with many speculating over when and at what price the company would bring it back online, especially in light of recent price gains.
"[There was a] big reaction to Glasenberg's comments yesterday after the Glencore figures but I feel it’s more everyone rushing to a crowded area anyway," Kamal said.
(Additional reporting by Archie Hunter, editing by Mark Shaw)