Is that it for the zinc price or does the market have one last hurrah before the bull cycle turns? London Metal Exchange (LME) zinc for three-month delivery hit a 10-year high of $3,595.50 per tonne on February 15, the culmination of a gradual but relentless tightening of the supply chain that had been playing out over several years.
Since then zinc has been dragged lower in the broader risk-off pull-back in the industrial metals space and is currently trading either side of the $3,250-per tonne level. Analysts, such as Max Layton of Citi, believe there is still the potential for one last leg higher to $3,800-4,000 per tonne. But time is running out. "The zinc price in the next three to six months is the best we're going to see for the next three to five years," he told last month's Metal Bulletin Zinc Conference in London.
The LME options market seems to agree, judging by the concentration of bull positioning over the next three months. Thereafter, open interest drops off sharply until December, when bearish views predominate. The consensus, it seems, is for zinc's bull cycle to peak sooner rather than later before a multi-year down cycle. But zinc confounded the bulls several times on the way up. Might it equally confound the bears on the way down?
The landscape of options positioning in the zinc market can't tell us where the price is going, but it does give a fair idea of where the market thinks the price might be going. And in the short term the market still seems to be collectively bullish. The number of call options, which confer the right to buy, dwarfs the amount of put options, which confer the right to sell, in April, May and June.
The April options expire today but as of last night's close there were 9,006 lots (225,150 tonnes) of call option open interest versus just 4,503 lots of put open interest. The upside skew is even more extreme in June with 18,349 tonnes of open interest on calls versus 4,301 lots on puts. The June market positioning is clustered on three main strike prices, namely $3,500 (7,902 lots), $3,700 (8,200 lots) and $4,000 (1,628 lots).
The very highest strike price open is $4,400, with 40 lots sitting there on each of the front three months. After June, however, options open interest falls off a cliff up to December, which tends to be a liquid month for options positioning in any given year. And although there are 4 lots of wildly optimistic call options open on the $5,000 strike in December, upside interest is eclipsed by downside put option positioning.
The market, in other words, appears to agree with the view of Citi's Layton and other analysts. If there's going to be one last bull hurrah, it's going to happen by July, after which options open interest and bull exuberance both plummet. This narrative of one last price peak is predicated on a building supply response to recent high prices.
The International Lead and Zinc Study Group (ILZSG) expects some 880,000 tonnes of additional mine supply to enter the market this year, according to Joao Jorge, the Group's director of market research, speaking at the same London conference. The ILZSG is forecasting mine production growth to accelerate from 3.6 percent in 2017 to 6.0 percent this year.
The mine surge will result from a combination of restarts, such as that announced by Glencore last December and new mines such as Vedanta's Gamsberg project in South Africa. The single biggest addition to global supply, however, will come from the Century zinc mine in Australia. Century closed in 2015 but New Century Resources aims to produce zinc concentrates from the old tailings at the mine site.
The company is guiding towards a restart of activity in the third quarter of this year with a one-year ramp-up to full capacity of 264,000 tonnes per year of contained metal. That's around half of what Century was capable of producing in its heyday. Century, it's worth remembering, repeatedly dashed bulls' hopes in the long build-up to this year's high prices by staying open much longer than expected.
The very fact it is coming back at all is astonishing, but will new Century, like old Century, spring more surprises on the unwary, this time by taking longer to ramp up than expected? If you're looking to the concentrates part of the market for an answer, you're in for a disappointment. This year's benchmark treatment charges for the processing of concentrates into metal should provide some insight into the state of play in the raw materials segment of the supply chain.
But after two fruitless rounds of meetings smelters and miners are still far apart on how much new supply to expect and how quickly to expect it. Uncertainty around these changing supply dynamics this year is going to remain a key unknown for many months. A more immediate threat to the zinc consensus might come from visible stocks. LME inventory has fallen from almost 900,000 tonnes in 2012 to a current 209,500 tonnes, just about all of it in the US port of New Orleans.
The occasional "arrival" of more zinc in LME warehouses in the city, such as the 79,000 tonnes that were warranted in a single day on March 2, has unsettled the market. There's nothing new to this New Orleans zinc roundabout but with visible stocks so low, what's happening to "invisible" stocks sitting in off-market storage takes on added significance.
Quite evidently, if more zinc miraculously turns up in the Big Easy, it puts at risk the potential for that widely-anticipated bull charge to new 10-year highs. There again, with only 143,225 tonnes of LME stocks available, the London price is going to remain highly sensitive to further cancellations and drawdowns.