The London Metal Exchange (LME) zinc market is experiencing its most severe supply squeeze in decades, with spot zinc prices rising for the third consecutive day. Traders are scrambling to acquire diminishing inventories, pushing prices to their highest level in over twenty years, resulting in significant pressure on short sellers to cover positions or deliver physical metal.
As of now, the spot zinc price at the London Metal Exchange has increased by 0.37% to $2,999 per ton, marking a third consecutive day of gains. The premium of spot zinc prices over three-month contracts has surged to $323 per ton, reaching the highest record in at least over twenty years. This spot premium phenomenon is a typical sign of demand exceeding immediate supply.
The current market tightness stems from Western smelters cutting production due to collapsing processing profits, leading to a dramatic drop in LME warehouse stocks close to historical lows in 2023. Currently, only 24,425 tons of zinc are available for withdrawal from LME warehouses, which is insufficient to meet even a day's demand in a global market consuming 14 million tons annually. The Tom/next spread, reflecting the cost of carrying over positions, reached $30 per ton on Tuesday, the highest level since 2022, and remained at $25 on Wednesday. LME data shows that six independent entities hold long positions corresponding to metal quantities at least three times the available stock.
Inventory Shortages Highlight Supply Vulnerability
The continued consumption of zinc inventory within the LME warehouse network has pushed the market to a critical point. Data from Tuesday indicates only 24,425 tons of zinc are available for buyers to withdraw. Duncan Hobbs, head of research at Concord Resources Ltd., stated, "Inventory levels are extremely low. The market outside China feels precariously balanced, making it susceptible to shocks like what we are witnessing now." Due to the reduction of output by various Western smelters following the collapse in processing profits, LME stocks have plummeted toward the historical low set in 2023. Analysts believe that export from China could be crucial in alleviating short-term market pressures if LME inventories fail to attract new metal inflows.
Bullish Positions Dominate Market, Bears Under Pressure
The substantial long positions indicated by LME data have put sellers holding short contracts in a difficult position. If physical metal delivery fails, these short sellers may face significant losses. Traders are hastily purchasing the remaining inventory, with the total metal quantity held by six independent entities corresponding to at least three times the immediately available LME inventory. Al Munro, senior base metals strategist at Marex, noted:
"LME warehouse holdings report reveals some important long positions. The reality is that the current spot premium structure of LME has not attracted a significant influx of physical metal and inventory."
Recent movements in industrial metals have been volatile, influenced by changing trade prospects and uncertainties concerning risk assets. The overall performance of the metals market was modest on Wednesday, reflecting a widespread wait-and-see attitude towards risk assets. Copper prices fell by 0.1% to $10,613 per ton, continuing to retreat after soaring to near historical highs earlier this month. Lead and tin saw slight increases.