Cancelled LME zinc stocks head to China

Chinese trading firms are moving zinc stocks stored at London-based metals exchange LME's warehouses to China, after cancelling large volumes of warrants in Europe and North America over the past month.

"Some [traders] have resorted to shipping metal from Antwerp and New Orleans to China. [It is not clear] whether that is to satisfy the tight spreads in Shanghai or for physical tightness," a trader said. Cancelled LME zinc warrants increased to 62,500t on 22 October, a jump of 18,575t, or 42pc from, 43,925t on 21 September.

The largest share of zinc warrants booked for removal is in Antwerp in Belgium, where 33,100t has been cancelled. A further 28,550t is cancelled in New Orleans, US, and 300t is cancelled in Bilbao, Spain.

The large volume of cancellations was partially driven by a profitable import arbitrage to China, as LME zinc prices fell below equivalents on the Shanghai Futures Exchange (SHFE). Some traders also pointed to supply shortage in China that could have underpinned the stock movement. "Nobody has got stock, Asia is completely empty of warehouse warrants," a second trader said.

Stock levels remained low in LME-listed warehouses in the four delivery ports in Asia-Pacific. There is only 50t of zinc stock warrants in Kaohsiung, Taiwan, and 550t has been booked for removal in the same location. There is no stock in Port Klang, Singapore, and Johor, Malaysia.

Zinc production in China has been severely impacted by a wave of environmental checks on industrial operations as part of the Chinese government's drive to crack down on pollution in the country. Chinese refined zinc output fell to 456,000t in September, a drop of 10pc compared to production in the same month last year. Production was 4.15mn t in January-September, down by 2.6pc on the year, data from the National Bureau of Statistics show.

Zinc production in India has also weakened this year as a result of deteriorating ore grades. Indian mining firm Vedanta Resources' subsidiary Hindustan Zinc (HZL) produced 162,000t of refined zinc in July-September, down by 16pc from 192,000t a year earlier.

HZL's refined zinc output totalled 334,000t in April-September, down by 13pc on the year. Mined metal production dropped by 2pc to 444,000t, reflecting the closure of opencast mining operations.

Indian suppliers have been actively purchasing in the global spot market to meet domestic demand as a result of reduced production. Many market participants still consider the global supply and demand outlook in the zinc market to remain unclear despite the supply disruption, and many currently prefer to sit on the sidelines. "Stock holders are locking in forward and sitting on stock," the second trader said.