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London Metal Exchange zinc inventories have tumbled to the lowest levels in more than three decades, but rising stocks and tepid demand in top metals consumer China are helping to dampen concern about potential shortages.
Shutdowns of some European zinc smelters this year due to high power prices has been a key reason behind low LME stocks of the metal mostly used for galvanizing steel.
Three-month LME zinc rallied along with other base metals in recent weeks as speculators cheered the reopening of China from covid-19 restrictions, touching the highest in over four months on Monday.
Some investors have also highlighted a slide in LME zinc stocks, which have plummeted 89% over the past 12 months to 20,000 tonnes, the weakest since July 1989.
Normally, that would set alarm bells ringing, but LME spreads are not reacting as if there were severe shortages.
“You’d think if LME stocks are so low you’d get a big backwardation, so the fact that you haven’t got that, is a fairly clear signal that there’s more metal out there than we can see on the LME,” said Dan Smith, head of research at Amalgamated Metals Trading.
LME spreads typically surge into sharp backwardations – where spot prices exceed those in the futures market – when LME stocks are low as traders scramble to line up supplies.
In fact, the backwardation of the zinc benchmark spread – the cash LME contract to three months futures – has eased to $19 a tonne from $127 in August.
Inventories in China have been rising in recent weeks, including on the Shanghai Futures Exchange, which has seen a near doubling of stocks to 35,098 tonnes over the past three weeks.
Also, so called “social inventories” of zinc ingots in China – bonded stock levels in seven regions assessed by local data provider Shanghai Metal Market (SMM) – have surged by 78% over three weeks ahead of the Chinese New Year holiday.
Relatively low global stocks are balanced by lacklustre demand, with about half of zinc consumption from the construction sector, which was badly hit last year in China.
“Given the steel capacity cuts seen, we have reduced our forecasts for zinc demand for galvanized steel,” Macquarie said in a note.
The bank expects the global zinc balance to flip to a surplus of 66,000 tonnes this year from a deficit of 321,000 tonnes in 2022.
(By Eric Onstad; Editing by Tomasz Janowski)
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