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(Repeat April 16. The opinions expressed here are those of the author, a Reuters columnist.)
* London zinc: tmsnrt.rs/2DiaLbp
By Andy Home
LONDON, April 16 (Reuters) – Zinc is under sustained attack from bearish funds.
The aggression was triggered Tuesday by the inventory report of the London Metal Exchange (LME), which reported 10 625 tonnes of inflow into foreign exchange warehouses.
The price of zinc in London fell from $ 2,867 per ton to $ 2,821.50 in 30 minutes. It stabilized briefly before falling and was around $ 2,815.00.
The funds multiplied on the shares as proof that the period of maximum tension of zinc is now over.
They were encouraged by signs indicating that the raw materials segment of the supply chain has gone from a deficit to a surplus. Surplus metals, because of zinc, must surely follow.
However, it is difficult to change the dynamics of the underlying market.
Similar bear attacks took place last September and again in February. In both cases, they were premature, with the price peaking at nine months at $ 2,958.00 in early April.
Did they call the third time? There are reasons to be cautious.
SIGNATURE PAYMENT FEES RETURN TO SURPLUS
Zinc bears have a right.
There is no longer any doubt that the market segment for zinc concentrates extracted from ores has moved from the supply deficit to the surplus.
The transition gauge comes in the form of processing charges, which are what a zinc smelter receives from a miner for the conversion of the metal concentrate.
Cash costs have been on a strong upward trend in recent months, as new mines and mines restart, such as New Century Resources, which has just announced a 50% increase in production in the first quarter.
What looks like the reference agreement for deliveries in 2019 confirmed the turnaround.
Korea Zinc Inc, South Korea's Teck Resources, of Canada, has an agreement with a processing fee of $ 245 per tonne.
This represents a sharp rebound from last year's processing costs of $ 147 per tonne and is the highest annual level since 2015.
The shift to foundries is reinforced by the return of price participation after two years of absence.
Increasing smelter margins should stimulate increased capacity utilization and allow excess raw materials to flow through the supply chain to improve the availability of refined metal.
This is especially true in China, where refined zinc production has been declining for more than a year due to lack of raw materials.
Outside China, rising processing costs should be a welcome relief for Nyrstar, the world's second largest refined zinc producer.
The Belgian company has seen its margins plummet over the past year to the point that it needed a new financial bailout from Trafigura to survive. This will see the Swiss trading house badume almost complete control with a 98% stake in a new operating company.
FEAST OR FAMINE IN REFINED METAL?
The change in supply dynamics in the zinc concentrate market has been closely watched by funds seeking to play zinc on the short side.
Their problem so far is that it took much longer than expected for the mining surplus to become a surplus of refined metal, hence the two ultimately unsuccessful attempts to lower prices in the third quarter of the year. last year and the first quarter of 2019.
The LME inventory report released on Tuesday seems to be proof that things are starting to change in the refined metal market. But as always with the London market, appearances can be deceptive.
The latest "arrivals" of zinc in the LME's storage network bring the cumulative inflows to 20,800 tonnes so far this month.
The main LME inventory has thus moved from a multi-year level of 50,425 tonnes to 66,475 currently.
But this apparent evidence of surplus could, counter-intuitively, be a sign of further tightening of the market.
It is no coincidence that metal is currently entering the LME system.
This is happening because of another particularly cruel problem related to the LME zinc contract.
The CMZN0-T, the "coming" gap of the LME, essentially the cost of buying a short overnight position, hit a record $ 60 per ton last Friday.
It was a one-of-a-kind transaction, based on Refinitiv time and sales data, which indicated that the spread was traded once at this level in the form of a cross client at the end of the day. .
But "Tom-next" stayed late by $ 20 per ton Monday morning before the April liquidation of positions during the "ringing" session at the open indifference that followed.
"Tom-next" was trading on Tuesday morning more serenely, but the wider CMZN0-3 cash spread over three months remains tight, ending Monday at a $ 68 backwardation.
Faced with such sanctions for having rolled short positions, some obviously chose to provide physical metal to protect them from their exposure.
The 8,000 tonnes of zinc that appeared in the LME warehouses in Rotterdam on Tuesday in the report seem to indicate that this is a distress delivery from off-market storage.
While it is clear that there is no more metal "beyond" the depleted LME stockpile, it has been dragged into the LME system only by historically extremely tense standards. .
BAD TIMING?
The peak of zinc prices for timing proves just as difficult as the initial timing of the rally.
This recovery has been repeatedly wrong, as the funds invested in the zinc deficit discourse have been unbalanced by sudden and significant deliveries of zinc into the LME storage network.
LME stock signals have been a poor indicator of the underlying market dynamics.
The question is whether they are more reliable now. This month's metal shipments into the LME sheds may not be a sign of imminent overhang, but simply a normal market response to the high spot premium. This bonus is based on a lack, rather than a surplus, of metal in the LME system.
Zinc bears are banking on rising inventories, which means that surplus days have arrived.
If they are wrong, holders of short positions will have more difficulties in the coming weeks.
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