Zinc Stocks Near 17-Year High Mask Metal’s Finance Usage

Apr 16, 2012 -- Zinc stockpiles close to a 17-year high are masking demand for the metal in financing transactions.

Inventories of zinc in warehouses monitored by the London Metal Exchange were little changed at 901,900 metric tons today after rising last week to the highest level since May 23, 1995, according to data compiled by Bloomberg. Production may exceed demand by 279,000 tons this year, Barclays Capital estimates. Still, the metal for immediate delivery on the LME last week was the most expensive to the three-month contract since December, a so-called backwardation that usually indicates concern about near-term supply.

The appearance of limited supplies is “wholly artificial,” said Stephen Briggs, an analyst at BNP Paribas SA in London. A significant proportion of material is “tied up in financing deals.”

Zinc for delivery in three months rose 0.5 percent to $1,993.25 a ton by 11:34 a.m. on the LME. Still, prices have fallen 14 percent in the past year as stockpiles expanded. Backwardation is when near-dated deliveries are more expensive than later supplies, while contango is the opposite market structure.

Zinc futures are in backwardation for deliveries to May and in contango for delivery until May 2013. Financing transactions involve a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango. Financing costs and expenses for storing metal influence profits on the transactions.

“There is so much metal around that warehouses believe that there is value in filling up” their space, said Andrew Silver, a trader at Natixis Commodity Markets Ltd. in London.

Buying Zinc

About 65 percent of LME zinc stockpiles are in New Orleans and 18 percent in Malaysian ports of Johor and Port Klang, according to the exchange.

Several parties at the same time may have been trying to buy zinc for April delivery and sell metal for May, according to Silver. They may want to get metal into their own warehouses, or a warehouse with which they may have struck a deal, he said. “Three groups of people trying to borrow the metal on one particular day and that can cause the tension,” he said.

One unidentified party held 50 percent to 79 percent of zinc LME stockpiles and open positions for the next three trading days as of April 12 in the Warrant Tom Banding Report published by the exchange. Cash zinc traded at a $4 a ton premium to the three-month contract today.