LONDON: London Metal Exchange (LME) zinc stocks have been raided this week, leaving available inventory close to depletion.

The zinc price is unimpressed, LME three-month metal sliding on Friday to a fresh 2022 low of $3,361 per tonne in tandem with the broader sell-off across the metals spectrum.

But that masks an explosion in time-spread tightness, the cash premium over three-month delivery spiking to $218 per tonne on Thursday, the widest it’s been this century. It’s an unwelcome development for the exchange after it had to suspend the nickel contract in March when a similar run on stocks caused a price melt-up.

There is a safety net this time around. The LME has imposed lending limits and allowed for deferred delivery across all its major contracts. Moreover, this zinc squeeze is firmly rooted in the physical supply chain. Indeed, it’s part of the resolution of that underlying tightness.

GOING, GOING

LME headline zinc stocks were already low coming into this week at 79,425 tonnes. They’re about to get a lot lower. The last four days have seen 48,575 tonnes cancelled in preparation for physical load-out. That leaves available live tonnage at just 14,975 tonnes, equivalent to a few hours worth of global consumption in a 14-million tonne market-place.

This is an acceleration of a long-running downtrend in LME zinc stocks. This time last year there were 258,000 tonnes sitting in LME-registered sheds and another 85,800 tonnes in off-warrant storage. Those shadow stocks have also largely gone, totalling a meagre 3,224 tonnes at the end of April, according to the LME’s most recent report.

All of that shadow tonnage was located at Asian locations. And so too is registered inventory. There is a single lot (25 tonnes) of available zinc in Europe - at the Spanish port of Bilbao - and none at all at US locations. Which tells you where the physical supply chain is tightest.

It’s turning out to be a bad year for zinc smelters. Europe’s energy crunch has already caused the curtailment of Glencore’s 100,000-tonne-per-year Portovesme smelter in Italy with other operators flexing run-rates around peak energy periods.

The region accounts for around 12% of global refined zinc output and the rolling disruption to supply has been reflected in record physical premiums of up to $500 per tonne over LME cash.