LONDON, June 28 -- Premiums on physical trades in zinc are edging up slowly in Europe on tight supplies, and some players expect increasing supplies of metal to become tied up in financing deals this year or next.
Financing deals, in which banks buy nearby material and sell it forward at a profit after arranging cheap storage costs, have tied up a significant amount of zinc in the United States and sent premiums there higher.
The deals are well known and widespread in the aluminium market, where about 70 percent of the roughly 4.45 million tonnes of London Metal Exchange stock are tied up and unavailable to the market.
"I think we're going in the same direction in zinc as for aluminium. It's more a trend in the U.S (but) we anticipate zinc financing deals will happen in Europe, (and) banks will get more involved in physical trading. That's a trend we foresee," a source at a European zinc smelter told Reuters on Friday.
Premiums, the amount paid over and above the LME cash price to cover the cost of shipping and delivering metal, for Rotterdam special high-grade zinc ZN-SHGDPP are currently at around $115 a tonne versus $90 in early January.
If banks start buying significant amounts of zinc for financing purposes in Europe, zinc premiums would almost certainly rise further, but it is still unclear whether zinc will ever be as popular as aluminium.
"In the U.S. there's surplus zinc supply, so it's better to sell it to a bank. Europe is a net importing market, so it's hungry for zinc. There's usually nothing left for banks to buy," said the source.
LME zinc stocks are at only 616,550 tonnes. By contrast, LME aluminium stocks are at 4.45 million tonnes, but premiums for Rotterdam western duty-paid AL-WDP still have risen to around $175 a tonne from $95 in early January because of financing deals.
"Aluminium is being tightly held. It's tied up in financial deals, and there's more demand than supply," said a Europe-based trader.
In nickel, by contrast, financing deals that tied up around two-thirds of total LME stocks are currently being unwound, because the market is so tight that selling the metal and pocketing the premium is the most profitable option.
"(Nickel premiums) have been very strong, especially for briquettes and cut cathode, which have been in high demand. LME stocks of briquette and cathode are very, very low -- non existent in fact," said Deutsche Bank analyst Daniel Brebner.
Looking ahead, he said if demand for nickel, particularly from the stainless steel sector, falls in the third quarter, spare nickel stock might increase and some financing deals could be reinstated.