COLUMN-LME zinc stocks cancelled – signal or noise? – by Andy Home (Reuters U.S. – September 19, 2014)

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(Reuters) – The zinc rally has run out of steam. The galvanising metal is still, just, the second-best performer among the base metals traded on the London Metal Exchange (LME) this year. But the benchmark LME three-month price has over the last couple of weeks retreated from above $2,400 per tonne to a current $2,260.

Some of the hot money that drove the price higher over June and July has left the market. The LME’s Commitments of Traders Report showed money managers trimming their net long position by 12,271 lots, or 306,775 tonnes, in the week to Sept. 12.

Given the likely preponderance of technical funds in that category, this collective rush for the exit may have been no more than a reaction to the loss of upside momentum and the subsequent price decline.

The real problem for zinc’s many bull followers is the gap between expectation and reality. The zinc story is one of looming supply crunch as some of the world’s biggest mines come to the end of their operating lives. But there is still scant evidence of any stress in the zinc supply chain.

Global mined and refined production are still rising and there are ample stocks of concentrate and metal to fill any emerging gap with demand. The rally, in other words, had got ahead of the story, leaving the London market vulnerable to precisely the sort of speculative blow-off experienced this month.

However, just at the moment the bulls are pulling in their horns has come a mass cancellation of LME stocks in preparation for physical drawdown. Cancelled tonnage in the system has mushroomed in five days from 52,000 tonnes to 145,650 tonnes. It now accounts for more than 19 percent of all LME inventory.

It’s precisely the short of signal an increasingly jaded bull market was hoping for. But is it a “true” signal or just noise?

SIGNAL?

The answer might well be a bit of both, because these cancellations have come in two distinct waves.

The first, totalling almost 20,000 tonnes, has taken place at Detroit and lifted the proportion of cancelled tonnage at this U.S. location to 52 percent.

This zinc has now in all probability joined the load-out queue at Metro, the dominant warehouse operator in Detroit. Although other warehousing companies are active in the city, only Metro held sufficient tonnage at the end of last month to account for such high cancellations, judging by the LME’s latest monthly breakdown of stocks by operator.

The queue for metals other than aluminium at Metro stood at 74 days at the end of August, according to the LME. It’s probably flexed a bit wider after the zinc cancellations.

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