LME stocks shock sends zinc price reeling

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London Metal Exchange (LME) stocks of the galvanising metal surged to a three-year high of 294,500 tonnes this week thanks to the “arrival” of 106,000 tonnes in the space of just two days.

The stocks shock has transformed zinc from outperfomer to laggard of the base metals pack. At a current $2,565 per tonne, LME zinc has fallen by 11% from its early January high of $2,897.

The delivery of so much metal in such a short period of time is a bit of market theatre, which seems to have had its intended effect.

However, the tension between signs of market surplus and falling LME inventory had been building for some time.

China has not come to the rescue of this particular industrial metal by hoovering up the rest of the world’s surplus metal as it has done for copper. Zinc imports actually fell last year.

Excess zinc has been steadily accumulating in the off-market shadows. Its sudden appearance has blindsided bulls trading a narrative of a raw materials crunch.

Shadow play
The global refined zinc market registered a supply deficit of 480,000 tonnes over the first ten months of 2020, according to the International Lead and Zinc Study Group (ILZSG).

Back in October the group forecast a 620,000-tonne surplus for 2020 and another hefty 463,000-tonne surplus for this year.

That’s pretty much the consensus view. Research house CRU, for example, thinks that the slump in demand due to COVID-19 restrictions led to a 500,000-tonne metal surplus outside of China last year, with a second year of excess supply expected in 2021. (“Zinc – Top 10 calls for 2021”, Jan. 27, 2021)

Even Goldman Sachs, which has been heralding the dawn of a new commodities supercycle, is cautious on zinc, “our least preferred” industrial metal.

When it comes to zinc, the super-bull bank is also with the consensus, projecting a cumulative 868,000-tonne surplus over 2020 and 2021. (“Metals Watch”, Jan. 14, 2021).

Yet this glut of metal was largely elusive last year. LME stocks rose by just 151,000 tonnes and from a very low base.

Arrivals slowed to a trickle over most of November and December and headline inventory actually fell by 10,500 tonnes over the fourth quarter.

The signs were there that metal was accumulating in the shadows. The LME’s “off-warrant” monthly report showed a 71,650-tonne build between February and November last year, centred on New Orleans, which accounted for 47,650 tonnes of this week’s inflow.

This is metal that is stored with explicit contractual reference to potential LME warranting, in effect a twilight zone between visible exchange stocks and invisible private inventory.

It’s turned out to be a useful indicator of a bigger stocks build away from the LME’s official figures.

There could be still more sitting “out there”, given the size of last year’s expected surplus.