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Zinc stocks registered at the London Metal Exchange on Wednesday rose above 1m tonnes for the first time in 17 years, a stark indication of the slowdown in demand for the industrial metal.
The zinc market is relatively small, with global production worth $28bn a year compared with nearly $200bn for copper, but its use as a protective coating for steel in construction, cars and home appliances make it a sensitive barometer of the global manufacturing industry.
Benchmark zinc prices for delivery in three months on the LME have fallen 9.3 per cent since the start of May, trading yesterday at $1,867 a tonne. LME-registered inventories rose 17,850 tonnes and are up 277,000 tonnes in the past eight months, compared with annual zinc consumption of about 13m tonnes.
“The headline stock number is a fair reflection of a market that is fundamentally in poor shape right now,” said Duncan Hobbs, analyst at Macquarie. “Zinc doesn’t look good.”
The increase in exchange stocks will be a boon for warehousing companies, whose revenues depend on the amount of metal they store.
But it will also fuel concerns among zinc users that the metal could suffer from the same long queues to take deliveries of the metal from the exchange that have bedevilled the aluminium industry. According to LME data, 106,000 tonnes of zinc are waiting to leave New Orleans, the location with the highest zinc inventories.
The rise in LME stocks is in part the result of the so-called warehouse wars, where traders buy metal and move it from a competitor’s warehouse to their own. “Expect material to be circulating around between warehouses as it goes out of one and into another,” said one senior zinc trader.
But it also reflects the weak fundamentals that have weighed on the market, driving down the share prices of leading producers such as Belgium-listed Nyrstar, whose shares have fallen 41 per cent since the start of the year.
Production of galvanised sheet steel, which is one of the main sources of zinc demand, fell 1 per cent in the second quarter from the previous three months, Mr Hobbs said, bucking the typical seasonal increase.
Moreover, Chinese miners have yet to curb production significantly in response to falling prices. “At present prices there’s no sign of the Chinese miners reining back output,” said Mr Hobbs. “The price has to fall further to force that.”
He said that the price might have to fall to $1,500 a tonne – 20 per cent below current levels – to force producer shutdowns that would rebalance the market.