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LONDON: London Metal Exchange (LME) stocks of zinc have risen above 90,000 metric tons for the first time since May of 2022 thanks to a surge of deliveries into Singapore.

A total 23,425 metric tons of the galvanising metal were warranted in the Asian city over Monday and Tuesday. The rapid rebuild in exchange inventory has kept the zinc price under pressure. Last trading at $2,375 per metric ton, LME three-month metal is treading water just above the three-year low of $2,215 recorded in May.

There may be more zinc to come, judging by the loose LME time-spread structure. The benchmark cash-to-threes spread has been in contango since April, a signal that zinc’s previous period of scarcity has come to an end. How much more will arrive in the market of last resort depends on China, which is stepping up imports of refined zinc.

CHINA FLIPS BACK TO NET IMPORTER

China imported 45,329 metric tons of refined zinc in June, the highest monthly tally since May 2021. The country turned net exporter last year, an inversion of previous trade patterns. The Chinese metal was needed to plug Western supply gaps following European smelter curtailments due to high energy prices.

The country exported 81,000 metric tons of zinc in 2022, including shipments of 7,800 metric tons to Mexico and 3,400 metric tons to the United States, two destinations that haven’t in the past featured in China’s zinc trade. Exports so far this year have almost evaporated, amounting to just 4,700 metric tons as the Western pull on Chinese metal abates. Rather, China is now reverting to its historic net import status, with inbound shipments totalling 98,300 metric tons in the first half of 2023, already more than it imported in all of 2022.

BUT FOR HOW LONG?

China’s increased appetite for refined zinc is surprising given the country’s smelters have been importing record amounts of mine concentrates and lifting their own metal production. Concentrate imports of 2.3 million tonnes in the first half of the year were up 25% on the first half of 2022, which broke all previous records.

The country’s monthly refined zinc production has been notching double-digit growth rates since March. It’s rising just at a time that Chinese demand is struggling. Zinc is heavily used in the construction sector, which continues to be a weak spot in the domestic economy.

So far, however, there is scant evidence of a significant build of surplus metal in the mainland market. Unlike the LME curve, that on the Shanghai Futures Exchange remains in backwardation. Shanghai exchange stocks peaked at close to 124,000 metric tons over the Lunar New Year holiday period. That was lower than last year’s seasonal peak, when stocks reached almost 180,000 metric tons. Headline inventory has since fallen back to a modest 56,942 metric tons, with Shanghai Metal Market reporting little change in off-market stocks, which have been holding steady above 100,000 metric tons for the last month. It looks like China’s own depleted supply chain is refilling, with little flow-through to visible inventory so far.

SHIFTING SURPLUS

China’s aggressive ramp-up of smelter run-rates and a return of some of the curtailed capacity in Europe should combine to process the backlog of concentrates that accumulated during last year’s smelter bottleneck. The conversion of surplus raw material to surplus metal is core to the current bear narrative around zinc, which has been the second-weakest performer among the LME metals this year after nickel.

The global market accumulated a surplus of 137,000 metric tons in the first four months of this year, according to the latest monthly assessment by the International Lead and Zinc Study Group.

Demand, particularly in Europe, has deteriorated further since then, with physical premiums sliding in quiet spot market conditions.

Fast markets assess the premium for zinc in Antwerp at a mid-point of $320 per metric ton over the LME cash price, down from $515 at the start of January. Any tightness in the European physical marketplace has eased, with the price reporting agency noting the availability of discounted non-European brands.

LME stocks do not fully reflect this physical backdrop. Even after this week’s flurry of arrivals, exchange inventory is still low by any historical yardstick. Whether it rebuilds further will depend at least in part on how much more metal China imports in the coming months.

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