[SMM Analysis] LME Stocks Climb While Backwardation Widens — What's Behind Zinc's Apparent Paradox?

SMM Sep 8 News:

From mid-August, LME official zinc stocks (registered plus cancelled warrants) began to build from a low of 86,500 tonnes on 17 August, rising to 113,100 tonnes by 4 September — a cumulative increase of 26,600 tonnes. Yet over the same window the LME cash-to-three-month (0-3) backwardation did not ease; rather, it expanded from USD 82.88/t on 17 August to around USD 168.62/t on 4 September. "Rising stocks" and an "ongoing squeeze" running in parallel look contradictory at first glance. How should we interpret this?

I. The "Phantom" Build: Total Stocks Flat, Deliverable Supply Tight

To read LME inventories correctly, one must first distinguish three categories: registered warrants (available for delivery), cancelled warrants (withdrawal requested, temporarily undeliverable), and off-warrant metal (stored in LME-approved warehouses but not yet warranted). The daily official LME figure widely tracked by the market covers registered plus cancelled warrants only.

1. The true total has barely moved. SMM's tracking of all three categories shows that most of the official-stock increase in late August and early September came from the conversion of off-warrant metal into warranted stock. On 17 August, the three categories combined totalled 115,900 tonnes; as early signs of Chinese zinc export-delivery emerged, the total edged up to 126,900 tonnes on 18 August, and by 4 September it still stood at 126,700 tonnes. In other words, the total zinc volume within the LME system has been essentially flat over the past two weeks — the "build" is largely a reallocation within reporting categories, not a genuine accumulation.

2. Deliverable (registered) warrants remain low. LME zinc registered warrants stood at 78,000 tonnes on 17 August, ticked up to 87,900 tonnes on 18 August, then drifted lower, holding at only around 82,900 tonnes by 4 September. More tellingly, from 27 August the cancellation ratio rose visibly to around 30% — meaning nearly a third of official stocks had been earmarked for withdrawal and removed from the deliverable pool. Tight deliverable supply coupled with an elevated cancellation ratio underpins the persistent widening of the backwardation.

II. China's Exports Are Still "In Transit": The Incremental Supply Has Yet to Surface in the LME System

From late July, China's zinc export window opened and stayed open through August and September. Starting in August, domestic zinc began flowing noticeably to Southeast Asian spot markets or into LME delivery. Market sources suggest Chinese zinc exports ran at roughly 20,000 tonnes in August and could rise to around 40,000 tonnes in September — which is also the primary driver of the recent domestic social-stock drawdown. SMM data show China's seven-region zinc ingot stocks at 222,100 tonnes on 7 September, down 28,900 tonnes from 31 August, with exports the main force behind the draw.

But a time lag exists between pulling metal from domestic warehouses, securing vessels, ocean freight and final entry into LME warehouses with warrant registration. In other words, the recent large-scale domestic draw is still "in transit." Currently the September and October backwardation structures are particularly pronounced, with some market participants positioning for disappointing arrivals ahead of the September prompt date (16 September).

Conclusion

Although LME official stocks have registered a gain, the total has not risen materially, deliverable inventories remain tight, and the Chinese export tonnage that has drawn down domestic stocks has not yet translated into scaled arrivals. Under the combined effect of these three factors, the LME near-month premium looks "biased to rise rather than fall." Continued attention should be paid to the eventual realised volume of Chinese export-to-warrant deliveries.

(The above information is based on market collection and comprehensive evaluation by the SMM research team. The information provided in this article is for reference only. This article does not constitute direct advice for investment research and decision-making. Customers should make cautious decisions and should not replace their independent judgment with this information. Any decisions made by customers are not related to SMM.)