Managers have been expanding their short positions in zinc, betting that this year's weakest performing base metal will go further.
Since the London Metal Exchange (LME) first published its Traders' Commitment Report in 2018, investing is now the most bearish.
The London Metal Exchange's three-month zinc** is now around US$2,400 per metric tonne, up 8% from the start of the year.
The use of zinc in galvanized steel means that the company has been severely affected by the poor state of the global construction industry, especially in China.
The global zinc market is generating large quantities of excess metals, some of which have just appeared in LME warehouses, pushing inventories to their highest levels since June 2021.
Judging from the spread of the LME, there may be more **, but given that the current ** erodes the cost curve, how much more can zinc's ** fall?
Bear attack
As of Friday**, managers raised LME zinc contract short** to 60,492 contracts, or just over 1.5 million mt. The previous record short position of 54,935 contracts** occurred in August last year.
After LME zinc prices hit a six-month low of $2,278** on 12 February, there is still significant investment** remaining confident in zinc.
But even on a net shortfall basis, the total shortfall of 18,012 contracts is the largest since 2018, surpassing the biggest bearish in February 2020**, when China was leading the world into COVID lockdowns.
It is worth noting that "other financial institutions", including index providers and insurers, are still net long zinc, but this has been significantly lower than the levels seen in the 2018-2021 period.
Zinc flood
Speculative short bets on the London zinc contract are on the rise, while LME inventories are rising rapidly.
A total of 72,750 tonnes of zinc were delivered on LME Singapore warrants between 6 and 16 February, raising overall inventory to 22850,000 tons. The last time LME inventories were so high was in the first half of 2021, when inventories peaked at 294025 tonnes.
Global commodities trader Trafigura is reportedly transporting metals from shadow warehouses outside the exchange to rent-sharing warehouses inside the exchange.
When inventory movements in the LME are determined by warehousing dynamics, it is a clear signal that there is a large surplus of metal flowing, even if it is not always visible.
The International Lead and Zinc Study Group estimates that the global refined zinc market was overused by 20 percent last year40,000 tons, the organization's latest in October, is that this year's surplus will reach a greater 3670,000 tons.
If judged by the time difference of the LME, it is very likely that more bulk deliveries will enter the LME system.
The benchmark cash to 3-month spread has risen to a super premium this week. The ** price on Wednesday was 42 per tonne$5, the highest in at least 20 years**.
Rising interest rates are certainly a factor in the rising cost of spreads, but the sudden widening of the spread structure this week looks a bad omen.
In the cost curve
With the deteriorating market situation, it is not difficult to understand why investment** is increasing bearish pressure.
But how much downside is there?
Zinc prices have penetrated deep into the production cost curve. Analysts at Citi calculated that the average cost of a 90th percentile mine last year was US$2,600 per tonne.
A number of mines have entered the care and maintenance phase, most notably Boliden's Tara mine in Ireland and Nyrstar's complex in Central Tennessee.
* Unexpected disruptions such as production cuts and the Ozerny fire in Russia have left the extracted concentrate market in deficit.
A processing fee is a fee charged by a smelter to convert a concentrate into a metal and is a good indicator of the availability of raw materials. **Reporting agency FastMarkets' current assessment of processing fees is $70 to $100 per tonne higher than LME cash.
This is a far cry from last year's benchmark of US$274 per tonne**, which shows how much concentrate was tightened last year.
Lower disposal costs are squeezing smelters' margins and already taking their toll.
Nyrstar, a Trafigura company, has put its plant in Budelel, the Netherlands, in a state of care and maintenance. Low disposal costs, combined with low physical metal premiums and high electricity costs, have eroded smelter profitability.
This is all a reaction of the construction ** to the oversupply of the market and low housing prices.
However, this does create tension with all the new short positions that are being established in the world.
How this tension is resolved will depend in part on how much more zinc will make its way out of the shadow of the warehouse into the LME's warehouse system.