Zinc's Early-Year Rally Fizzles Out As Market Prices In Supply Surge

As the market pricing in an impending supply increase, the early year rise in zinc has swiftly faded. Growing anticipation that idled zinc smelter capacity will start operating again, especially in Europe and China, has caused a price reversal and brought back zinc excess after a two-year shortage.

Late in January, the price of zinc on the London Metal Exchange (LME) three-month metal increased 16% to a five-month high of $3,512 before falling to $3,040.

Supply Chain Tightness And Persistent Turbulence In Time-Spread

Up until a significant recovery in exchange stocks, the gap between cash-date reality and future expectations is likely to remain. Holders of LME short positions may use some surplus right now. Exchange inventory is still at an all-time low, which causes ongoing time-spread volatility. The crux of the present rolling squeeze is the mysterious tom-next spread on the LME, which is what a short pay for rolling their position from tomorrow to the next day.

LME Zinc Stocks And Depleted Inventory

Only 25,075 tons of zinc is held in LME inventories, which is less than a day’s worth of world use. Despite a minor rebuild over the previous few days, as of 6 March 2023, four large, long positions on cash zinc were visible in the exchange’s most recent positioning data. This all serves to highlight how low the LME zinc stocks are.

European Smelter Restarts And Supply Surplus

The tightest part of the global supply chain is still in Europe. Three zinc smelters in Europe have been idled because of high electricity costs, and several more are now operating at reduced capacity. The European smelter margins have nonetheless returned to being positive, and the local energy market seems to have overcome its winter difficulty. The bank recently revised its short-term zinc price expectation from $3,500/ton to $2,900 considering its current belief that the market is pricing in large smelter restarts sooner rather than later. A slight supply surplus of 70,000 tons is what Citi is predicting for 2023.

Insight 

As zinc prices surged due to increased supply, the early-year rally of the metal has fizzled out. Any extra production will take time to reach the market, and LME zinc prices will remain unstable for some time as speculation on a return to surplus must deal with the low stock environment of today. The prognosis for the zinc market depends on when and how much of the European supply will return. The recent price reversal in zinc shows how crucial it is to monitor supply chain dynamics and how they might affect commodity prices.

Read More – World’s Top 6 Aluminium Producing Countries