London 21/12/2016 - New Orleans might soon lose its reputation for being a graveyard for zinc. Zinc ingot cancellations from London Metal Exchange-bonded warehouses in the US city have shot higher over the past six months, indicating that metal might finally start to move out of town.
Total cancelled warrants stood at 85,050 tonnes as of December 19 after reaching a high of 90,250 tonnes on December 7, the highest level since late 2015. This is a big change from June, when total cancelled warrants were at just 10,100 tonnes, the lowest level in 10 years.
This suggests that there has been a change in attitude toward New Orleans, which has traditionally been the dumping ground for the rest of the world's zinc oversupply. For years, participants in Asia and Europe have effectively kept their regional markets tighter by shipping zinc to the US port.
But since July 1, a net 40,500 tonnes have left LME warehouses in the city. During that same period, cancelled warrants climbed to the current level of 85,050 tonnes from 12,225 tonnes.
And there have been large one-off cancellations of 9,550 tonnes on December 7, 12,475 tonnes on December 5, 11,625 tonnes on November 11 and 30,550 tonnes on October 24. This is in addition to a host of 4,000- to 6,000-tonne cancellations.
There are a number of theories to explain why this material has been cancelled. The most popular is that traders are stockpiling in cheaper off-exchange warehouses until premiums or prices rise in the USA.
"It could be for future consumption somewhere, and people are taking it off the LME now to avoid expensive rent," one USA-based trader said.
Zinc recently emerged as the darling of the base metals community. The global market for refined zinc swung to a 277,000-tonne deficit in the first 10-months this year in contrast to a 201,000-tonne surplus in the same year-ago period.
As a result, the LME zinc price has almost doubled, with the three-month contract closing the official session at a nine-year high of $2,911 per tonne at the end of November.
However, the rise in LME prices has not yet filtered through to US zinc premiums and demand, which remain below optimal levels. Metal Bulletin sister publication AMM’s most recent assessment of the US special-high-grade zinc spot premium was 6 to 6.5 cents per lb, with many market participants anticipating lower premiums for 2017 compared with this year.
"Nobody in the zinc business has talked to me. It’s been very quiet in terms of people selling because people don’t want to buy additional material now," a second US trader said.
Alternatively, some traders believe the cancellations and deliveries out of New Orleans have merely been a warehousing strategy, wherein the material is moved to different facilities that offer lower rent and better terms.
"The cancellations look more like a warehouse play than anything to do with the physical market," a third trader said.
A third possibility is that some of the cancelled material will move to the Middle East or Southeast Asia. New Orleans LME warrants are available for as little as zero to $5 per tonne, while premiums in the in Southeast Asian spot market range between $120 and $140 per tonne on a duty-paid free carrier agreement basis.
Still, a spot premium of above $150 would need to exist in the port of destination to make a profit from New Orleans material, according to a Metal Bulletin analysis.
"I can't see that trade being possible at the moment, the numbers don't add up—shipping rates have gone up and the premiums still haven't risen high enough to allow a steady flow of material to come from the [USA]," an Asian market source said.
Even if the acquirer of the material intended to deliver against long-term contracts, most of this year's contracts have been settled below $150 per tonne, thus limiting or eliminating any profit.
Additionally, much of the material that is on-warrant in New Orleans is well known for causing frustration for traders due to the age of the ingots, with some material there believed to be nearly 10 years old.
Placing material older than two years can prove difficult, particularly from this location, which has a reputation for holding less than aesthetically pleasing metal.
Traders said their clients are primarily looking to get 2015 and 2016 certificates of authenticity. In particular, Middle Eastern galvanizers are averse to pre-2015 production.
But a fourth trader in the USA did not think it would be difficult to sell material that is more than two years old, given that zinc is resistant to corrosion. "I don’t believe it’s a big deal for [consumers]. The metal doesn’t change, especially in the case of zinc. It’s resistant to corrosion."
The second trader agreed. "Zinc is used for galvanizing. It can last for 25-50 years. Why wouldn’t people want it?"
(Millicent Dent in New York contributed to this article)