Zinc premium reaches six-year high as inventories shrink

Zinc for immediate delivery reached the highest premium in six years to the three-month contract in London amid shrinking stockpiles, financing accords and moves to roll bearish bets forward, according to Sucden Financial Ltd.

The gap expanded to $38 a tonne by the close on the London Metal Exchange. That was the widest backwardation since August 13, 2007, data compiled by Bloomberg showed. A fee to borrow the metal for a day reached a three-year high. A single party held a share of available LME zinc stocks and positions on the exchange as of February 26 that Sucden deemed "significant."

"Generally the market has been running short, and this is the result," Steve Hardcastle, the head of client services for industrial commodities at Sucden in London, said on Friday. "The shorts have to cover and the longs don't."

A short position is a bet on lower prices and a long is a wager on a gain. Borrowing a ton of zinc for a day in London, or making a simultaneous purchase and sale for later delivery, cost as much as $15 on Friday, the most since November 2010. One unidentified party held as much as 39 per cent of available LME inventories and positions on the bourse as of February 26, according to data from the exchange.

Backwardation, or higher prices for earlier deliveries, usually signals limited supplies of metal. Zinc inventories tracked by the LME are the lowest since December 2011, and orders to draw supplies from inventories, or cancelled warrants, account for 26 per cent of the total. About 60 per cent of stockpiled LME zinc may be locked into financing accords and unavailable to consumers, according to Societe Generale SA.

New orleans
"It's a function of cancelled warrants and the financing arrangements going on at the moment," Hardcastle said of the wider premium.

Zinc inventories fell for a 25th session to 761,725 tonnes, daily LME data showed. Stocks, concentrated in New Orleans, dropped 18 per cent this year. Cancelled warrants are the lowest since September 2012.

Financing accords involve buying metal for nearby delivery while making a forward sale to benefit from a market in contango, when prices climb for later deliveries. Spot zinc traded at a discount of as much as $41.50 a tonne to the three- month contract last year, data compiled by Bloomberg showed.