Column: Funds amass record bear bets on zinc as LME stocks jump: Andy Home

Nyrstar NV

23/02/2024 24:00

(Repeats Feb. 22 column without change)
    By Andy Home
       LONDON, Feb 22 (Reuters) - Fund managers have been
scaling up short positions on zinc, betting that this year's
weakest base metals price performer has further downside. 
    Investment fund positioning is now the most bearish it's
been since the London Metal Exchange (LME) first launched its
Commitments of Traders Report in 2018. 
    LME three-month zinc  CMZN3 , currently trading around
$2,400 per metric ton, is already down by 8% on the start of the
year. 
    Zinc's use in galvanised steel means it is heavily exposed
to the fortunes of the ailing global construction sector,
particularly that in China. 
    The global zinc market is generating a lot of surplus metal,
some of which has just turned up in LME warehouses, lifting
stocks to the highest level since June 2021. 
    More may be on the way judging by LME time-spreads but with
the price now eating into the cost curve, just how much further
can zinc fall? 
    
    BEAR ATTACK
    Fund managers lifted short positions on the LME zinc
contract to 60,492 contracts, or just over 1.5 million tons, as
of the close of business last Friday. The previous record short
positioning of 54,935 contracts occurred in August last year.
    There are still plenty of investment funds keeping the faith
with zinc after the LME price bounced off a six-month low of
$2,278 on Feb. 12. 
    But even on a net basis the collective short of 18,012
contracts is still the largest since 2018, exceeding the
previous point of maximum bearish positioning seen in February
2020, when China was leading the world into COVID-19 lockdown. 
    It's worth noting that "other financial institutions",
covering index providers and insurance players, are still net
long of zinc but at much reduced levels relative to the
2018-2021 period. 
    
    ZINC FLOOD
    The accumulation of speculative bear bets on the London zinc
contract has played out in tandem with fast-rising LME warehouse
stocks. 
    A total 72,750 tons of zinc were delivered onto LME warrant
in Singapore between Feb. 6 and 16, lifting headline inventory
to 228,500 tons. The last time LME stocks were so high was in
the first half of 2021, when they peaked at 294,025 tons.
    Global commodities trader Trafigura is reported to be
delivering metal from off-exchange shadow storage into an
on-exchange rent-sharing warehouse deal. 
    When LME stock movements become defined by warehousing
dynamics, it's a sure sign there's a lot of surplus metal
floating around, even if it's not always visible. 
    The International Lead and Zinc Study Group estimates the
global refined zinc market notched up a 204,000-ton supply-usage
surplus last year and its most recent forecast in October was
for an even bigger 367,000-ton glut this year.   
    More large-volume deliveries into the LME system are quite
possible, if LME time-spreads are anything to go by. 
    The benchmark cash-to-three-month spread  CMCU0-3  has moved
into super-contango this week. It was valued at $42.50 per ton
at Wednesday's close, the widest it's been in at least two
decades. 
    Higher interest rates are of course a factor in the cost of
carry but this week's sudden widening in the spread structure
looks ominous.
    
    INTO THE COST CURVE
    With market optics deteriorating, it's not hard to see why
investment funds are piling on the bear pressure. 
    But just how much more price downside is there? 
    The zinc price is already trading deep into the production
cost curve. Analysts at Citi calculate that 90th percentile mine
costs averaged $2,600 per ton last year. 
    Several mines have already gone into care and maintenance,
most notably Boliden's  BOL.ST  Tara mine in Ireland and
Nyrstar's  NYR.BR  Middle Tennessee complex.   
    Price-induced cutbacks and unexpected outages such as the
fire at the new Ozerny mine in Russia have pushed the mined
concentrates segment of the market into deficit. 
    Treatment charges, the fees levied by a smelter for
converting concentrate into metal and a good indicator of raw
materials availability, are currently assessed by price
reporting agency Fastmarkets at $70-100 per ton over LME cash. 
    That's a long way off last year's benchmark of $274 per ton,
which tells you how much concentrates availability has tightened
over the last year. 
    Lower treatment charges squeeze smelter margins and there
have already been casualties. 
    Nyrstar, which is owned by Trafigura, has placed its Budel
plant in the Netherlands on care and maintenance. Low treatment
charges have combined with low physical metal premiums and high
power costs to undermine the smelter's profitability. 
    This is all part and parcel of the building supply response
to market oversupply and low prices. 
    It does, however, create a tension with all the new short
positions being established by the fund community. 
    How this tension is resolved will in part depend on just how
much more zinc makes its way from the storage shadows to the LME
warehouse system. 
    
    The opinions expressed here are those of the author, a
columnist for Reuters

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Funds lift short positions on LME zinc to record levels    https://tmsnrt.rs/3I95G6d
LME zinc spreads move to super contango    https://tmsnrt.rs/3T7o3ik
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by David Evans)
 ((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter
https://twitter.com/AndyHomeMetals))