The one thing you can say about a confusing zinc market is we can expect it to continue with conflicting signals and be overlaid with volatility this month. Along with just about all the base metals, zinc has been on a relentless slide for the last year.
They all enjoyed a short-lived rally in the spring but normal business quite promptly resumed and the short term expectation is for little change.
However zinc, like aluminum, has been the subject of intense investor interest because of the strong forward curve supporting the stock and finance trade.
Stockpiles Trending Lower
Metal stocks in New Orleans, a location sufficiently far from any significant area of demand to put the metal in limbo, are a direct result of this trade. London Metal Exchange zinc stocks have been trending lower, all of which in a “normal” market might suggest supply is tightening.
But zinc, for the reasons given above is not in a normal market. Short, long and speculative players are engaged in a battle for supremacy over future price direction according to an excellent article by Thomson Reuters’ Andy Home this week.
Although the medium-long term forward curve for zinc is strongly in contango, with forward dated prices well above spot, the near dated prices are being bullied around by a few players holding massive positions. Home, who is always excellent at reading the position data, reports one long is holding positions equivalent to 30-40% of the open interest, or somewhere between 189,000 and 252,000 metric tons for an LME market of only 379,800 tons.
Longs vs. Shorts
Positioned against the longs are a few shorts, and a battle royal is going on over the tomorrow/next prices. The position market, it has to be said, is net short suggesting the balance of opinion is that the price has further to fall.
What about the fundamentals you may reasonably ask? They are not great in terms of offering any price support. The ILZSG assess the global refined zinc market as being in a 142,300 mt surplus for the first five months of this year. As Home reports, Chinese production is booming, up 18% over the same period and along with many other base metals underlining how China is not only buying less refined metal but making more of its own, moving to becoming a net producer of some metals rather than net consumer and engine of metal demand. Chinese imports of refined zinc have, in Home’s words, imploded slumping to 126,600 mt in the first half from 310,000 mt in the same period of 2014.
The only short-term support could come, ironically, from all those shorts. At some point they are going to look to cover and in the process could create volatility and possibly price support, for a while. But any respite is likely to be short-lived. Like aluminum, zinc demand is rising but supply is rising faster and allowing for volatility in the short term the outlook is similar for both until the pain of falling below the cost curve finally kicks in.