LONDON, Nov 20 (Reuters) – The London zinc market is experiencing unprecedented tightness this week. As of Monday’s close, the London Metal Exchange’s (LME) benchmark cash-to-three-months spread CMZN0-3 was valued at a backwardation of $97 per tonne.
The cash premium is now higher than the last spike in October 2017 with the only historical comparison the years 2006-2007, when LME stocks were also super low and the outright price hit an all-time high of $4,580 per tonne. Fast forward a decade and the LME three-month price is currently treading water around $2,600, a long way off its February high of $3,600 per tonne.
This dissonance between spreads and price is a manifestation of the greater financialisation of the zinc market over the intervening decade with fund money a more powerful price driver. And funds have been playing zinc from the short side since February, catching the unwary in a biting bear trap.
Things may ease a bit after this week but zinc’s period of peak tightness is here to stay a while yet. Investors turned negative on zinc almost as soon as it scaled those February highs. The market narrative turned on a dime from one of bullish raw materials squeeze to one of bearish mine supply surge.
Deepening concern about the macroeconomic implications of the simmering trade war between the United States and China simply reinforced the consensus view that zinc had seen the highs for this particular cycle.