Will A Short Qqueeze Re-occur in LME Zinc Market?

SHANGHAI, Jul 4 (SMM) - Sky-rocketing LME nickel prices since March this year under the influence of short squeeze have drawn much market attention. Similarly, there are fears recently that LME zinc market may also experience a  short squeeze, given the sharp increase in LME zinc positions and a surge in cancelled warrants of LME zinc. SMM will analyse on the possibility of a short squeeze occurring in the LME zinc market from the perspective of fundamentals. 

Recently, the LME zinc cash-to-three-month backwardation soared to $218/mt, reaching the highest level since 1997. The excessively high open interest of LME zinc front-month contracts has increased trading risks and triggered concerns of a potential short squeeze. Although the backwardation has fallen back to $57/mt, it remains at a high level. 

Currently, LME zinc inventory totals about 80,000 mt, which is the lowest level since April 2020. LME zinc inventory stood at 73,400 mt in Asia, 8,100 mt in Americas, and merely 25 mt in Europe. The low inventory has turned the market more sensitive.

In a desperate move by some traders to retain their long positions, the cancelled warrants of LME zinc have spiked from over 20,000 mt to 64,000 mt, sending the ratio of cancelled warrants up from 24.93% to an alarmingly high of 81.09%. As a result, the LME zinc inventory that was available for trading in the market has fallen drastically to 19,800 mt. Investors and industry hedgers who held soon-to-expire short positions are hesitant about covering their positions.  However, SMM does not expect LME zinc market to see a short squeeze that is as severe as that of LME nickel. This is because the short squeeze in the LME nickel market occurred at a time when the Russian-Ukraine war intensified the energy crisis and Norilsk nickel was banned from LME delivery. The picture is different for LME zinc, whose prices pulled back along with other base metals as US interest rate hikes sparked market concerns about economic recession. As zinc consumption is expected to weaken, zinc prices will lack driving forces for a sharp rise. In addition, in the wake of the short squeeze in the nickel market, the LME has set up a number of restrictive measures, which will act as obstacles for a short squeeze in the zinc market. As of June 30, LME zinc cash-to-three-month backwardation dropped back to around $57/mt. It is worth noting that the cancelled warrants are still stored at LME warehouses, which can either be shipped out of LME warehouses or re-registered as warrants, thus adding to the uncertainty over the ratio of cancelled warrants. 

Although the LME zinc inventory has dropped to about 80,000 mt, the high spot premiums and wide backwardation may stimulate the release of overseas invisible inventories. In addition, with the decline in global ocean freight after the shortages of shipping capacity has eased, and the outflows of Chinese zinc ingots after the export window has opened, more zinc ingots may be available for sale.

Therefore, SMM believes that the possibility of a short squeeze in the LME zinc market is low in the short term.