Zinc inventories on the London Metal Exchange (LME) have dropped to their lowest in more than 30 years. But increasing stocks and weak demand in China, the world’s largest consumer of metals, are assisting to ease worries about potential shortages.
Closures of certain European zinc smelters in this year because of high electricity prices have been a major contributor to low LME inventories of the metal. Which is mostly use for galvanising steel.
As speculators hailed the lifting of China’s COVID-19 limitations, three-month LME zinc rose recently alongside other base metals, reaching its highest level in more than 4 months on Wednesday.
A decline in LME zinc inventories, which have fallen 91% in the last twelve months to 19,150 tonnes. The lowest level since July 1989, has also drawn attention from certain investors.
That normally would raise red flags, although LME spreads are still not behaving as though there are serious shortages.
According to Dan Smith, research head at Amalgamated Metals Trading. “You’d assume if LME inventories were that low you’d have a massive backwardation. And thus fact that you haven’t had that, is a really strong indicator that there’s more metal available than we could be seen on the LME.“
Zinc inventories dropped to lowest in 3 Decade’s
When LME inventories are low and traders are rushing to get supply. LME spreads frequently spike into strong backwardations, where spot prices are higher than those on the futures market.
In fact, the zinc benchmark spread, which is the difference between the cash LME contract and the three-month futures, has shrunk from $127 per tonne in Aug to $18 today.
Inventories have been increasing in China over previous few weeks. Especially on Shanghai Futures Exchange, where they have nearly doubled to 35,098 tonnes during the last 3 weeks.
Additionally, over the past three weeks leading up to the Chinese New Year vacation, so-called “social inventories” of zinc ingots in China – bond inventory volumes in seven locations as determined by local data source Shanghai Metal Market (SMM)—have increased by 78%.
A sluggish worldwide demand, which accounts for nearly half of zinc use and was severely impacted in China last year, balances lesser global zinc inventories.
In a note, Macquarie stated that “given the steel capacity reduction seen, we have decreased our projections for zinc demand in galvanised steel.”
The bank predicts that global zinc ratio would change from a shortfall of 320,000 tonnes in 2022 to an excess of 67,000 tons this year.