Wed, 16 Oct 17:01:00 GMT
By Freya Berry
Oct 16 (Reuters) - Zinc stockpiles in London Metal Exchange-registered warehouses in New Orleans shot up by 75,000 tonnes in one day this week, data showed on Wednesday, which analysts and industry sources ascribed to a financing deal.
The deals are widespread in the metals industry due to a glut of some metals, low borrowing costs and a wide forward pricing curve, making it profitable for traders to store metal in warehouses and to sell forward at a higher price.
One industry source, who declined to be named, said a large metals trader had put the metal on warrant - documents of possession that are used as the means of delivering metal under LME contracts - as part of a financing deal.
"If there's a contango in the market, as there is in zinc, then you can physically store it in a LME warehouse, sell forward and lock in the contango," said Societe Generale analyst Robin Bhar said.
"You've had this fun and games now for several years with metals being financed and then locked away," Bhar said.
A market is in contango when prices in the future are higher than the current one. The contango in zinc has widened to $39 per tonne from $28 at the beginning of July.
Financing deals have locked away mountains of metal, particularly aluminium and zinc. Both metals are in oversupply.
New Orleans has 60 percent of the roughly 1 million tonnes of zinc stored in LME-registered warehouses. More than half of the zinc is waiting to be delivered out of warehouses there, but the wait time for metal can be months.
"There's a queue, and you're exacerbating the queue, so it's going to take even longer to get delivered out. In the meantime, rent will be paid on it (zinc) every day that it stays in the warehouse," said Bhar.
The LME announced a plan in July to shorten the wait time to get metals from the warehouses it oversees.
Critics of the situation, which has dogged the LME for years, say the actions of companies attempting to profit from building up metal stocks has distorted prices and created supply bottlenecks.
On Wednesday benchmark LME zinc fell 1.8 percent to $1,895 per tonne in early trading but erased most of its losses to close almost flat at $1,927.
"I think anyone trying to read too much into LME stock movements would be in danger," said Gayle Berry, analyst at Barclays Capital, of the disconnect.
"It's just another reflection of how much metal there is sitting off-warrant in the zinc market."
(Additional reporting by Maytaal Angel, editing by William Hardy)