LONDON (Reuters) - Zinc is the latest industrial metal to stage a full COVID-19 recovery.
London Metal Exchange (LME) three-month zinc hit a six-month high of $2,312 per tonne on Thursday. At the height of the industrial metals’ coronavirus meltdown in March, zinc touched a four-year low of $1,675, at which stage it was down 22% on the start of the year. The gap is now less than 1%.
The exuberance comes despite a surge in LME warehouse stocks, which at 188,175 tonnes are the highest they’ve been since October 2018.
It’s an ominous sign of the potential mountain of unsold inventory that has accumulated during the lockdown of large swaths of global manufacturing capacity.
Investors seem to be unfazed, lifting long positions in both London and Shanghai markets with the focus on the unfolding Chinese recovery story.
Rising LME zinc stocks, however, highlight the narrative tension with the rest of the world, which is recovering only fitfully or not at all.
LME warehouses have seen cumulative inflows of 71,525 tonnes since the start of last week.
The arrivals have been concentrated on Malaysia’s Port Klang (12,025 tonnes), Singapore (24,150 tonnes) and New Orleans (29,500 tonnes). The latter has long been a favourite traders’ storage hub since the city is stranded in terms of zinc consumption, meaning stocks can build without undermining physical premiums elsewhere.
Sometimes metal is drawn to LME warehouses by a premium for cash metal. But there has been no such premium in the London zinc contract since May, since when the benchmark cash-to-three-months timespread has traded in gentle contango.
Lacking any obvious pull, the inference is that the metal has been pushed onto the exchange as surplus inventory accumulates in the physical market.
LME stocks are now up by 136,975 tonnes on the start of the year. However, the International Lead and Zinc Study Group (ILZSG) estimates the global refined zinc market registered a supply surplus of 241,000 tonnes in January-May alone.
Analysts at CRU are looking at a 485,000-tonne surplus over the course of the year, while the median forecast in Reuters’ July poll of analysts was a surplus of 403,000 tonnes.
It’s hard to avoid the conclusion that more metal is likely to find its way into LME warehouses over the coming weeks and months.
The looming shadow of surplus hasn’t, however, deterred speculative money from flowing into the zinc market.
Investment funds tracked by the LME’s Commitments of Traders Report turned collectively net short of zinc in February, unsurprisingly given the scale of the first-quarter price collapse.
Those shorts have since been covered and net positioning turned bullish again earlier this month. The net long remains modest at 6,102 contracts but the change in sentiment is clear.
LME broker Marex Spectron publishes its own estimates of speculative positioning but has picked up the same trend. As of Monday’s close of business zinc “exhibits a net spec long of 3.4% of open interest, which is close to year-to-date highs”.
Chinese speculators also appear to have rediscovered their enthusiasm for base metals.
Zinc is the latest Shanghai Futures Exchange (ShFE) contract to attract bullish attention, open interest building from 180,000 contracts two weeks ago to a current 219,000.
The Shanghai zinc price has outperformed London and is at its highest levels since November last year.
That’s the clue to what is powering this zinc price recovery.
Zinc market optics in China look very different. Unlike the London market the Shanghai curve is backwardated through February 2021.
ShFE zinc stocks currently stand at 89,188 tonnes, down by 81,000 tones from the March highs at the height of China’s lockdown.
Industrial metal markets are tracking the flow of Beijing’s stimulus funds and zinc ticks the construction and infrastructure boxes in the form of galvanised steel.
China’s automotive sector, another big galvanised user, appears to be experiencing its own sharp recovery with sales up 11.6% in June on the back of strong demand for trucks and commercial vehicles.
It’s noticeable that China’s imports of refined zinc have started picking up over the last two months, with June’s tally of 64,700 tonnes the highest monthly total since August last year.
Imports of zinc concentrates, by contrast, fell 40% month-on-month to 213,000 tonnes, indicating lower availability from countries such as Peru where production has been hit hard by quarantine measures.
The sharp turnaround in the zinc raw materials market this year is expected to continue capping concentrate availability with a knock-on effect on China’s zinc smelter production in the second half of this year.
A constrained zinc supply chain and a recovery in end-use demand are combining to generate a bull narrative in the Chinese market.
That exuberance is now spilling into the London market, as fund managers look to re-enter a sector they shunned in the first half of the year.
There is an obvious parallel with the last economic crisis a decade ago, when China came to the rescue of bombed-out metal markets in the form of a shock-and-awe stimulus package.
Copper in particular is trading the possibility of history repeating itself. Copper traders, however, can point to the massive flows of refined metal that have been making their way to Chinese ports. The transfer of Western surplus to China reinforces the sense of deja-vu with the global financial crisis.
Zinc, however, is not seeing anything like that level of Chinese buying interest. Cumulative imports were still down by 34% over the first half of the year.
But it is seeing surplus metal starting to hit the LME warehouse system, a sign that the manufacturing world outside of China is still far from full recovery.
Copper can ignore this East-West dissonance for now. Zinc, however, is going to find it a lot harder, particularly if LME stocks continue rising at this sort of pace.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Susan Fenton