LONDON, Sept 26 (Reuters) – Zinc bulls have been waiting a long time for this, but the slow-burning supply crunch has at last travelled all the way down the supply chain to bite holders of short positions on the London Metal Exchange (LME). LME time spreads exploded last week and they’ve grown wilder still this week.
The benchmark cash to three-month spread CMZN0-3 closed on Monday at a backwardation of $66 a tonne. That’s the widest cash premium since January 2007. Contraction of the forward curve reflects acute tightness on the cash date itself as evidenced by continuing turbulence within even the shortest-dated of LME spreads.
With exchange stocks falling and more metal being cancelled before physical load-out, those who have taken short positions look set for a torrid time. However, this sort of extreme tightness on the LME could yet prove a double-edged sword for bulls if it sucks “hidden” metal out of off-market storage.
WHO HAS ALL THE ZINC?
The whole front part of the LME zinc curve is now showing signs of extreme stress.
“Tom-next”, that curiosity of the LME’s complex trading date system, has been trading in backwardation since the start of last week. The cost of rolling a short position from tomorrow to Thursday has this morning been as high as $15 a tonne.
The cash-to-October spread CMZN0-V7 flexed out to a $45 backwardation on Monday and around $40 this morning. The mechanics are pretty straightforward. The LME’s market positioning reports have shown one entity controlling 50-80 percent of available LME stocks over the past few days.