Great Trades

Great stock trades based on fundamentals and technical analysis.

Saturday, December 23, 2006


Why LME Zinc Inventory Depletion has Paused

Some readers have asked us if we had an explanation for the recent short-term change in trend for the LME zinc inventories (which has caused recent weakness in zinc mining stocks). The trend change is hardly noticeable on the 5-year and 1-year charts:

but it’s apparent on the 60-day and 30-day charts:

Why has the downtrend in LME zinc inventories paused in the 85,000-89,000 tonne range the last few weeks?

We believe 2 short-term factors have created a short-term surge in zinc supply which has caused the pause in the LME inventory downtrend.

  1. The world's biggest zinc mine, Teck Cominco's Red Dog in Alaska, had some delays in shipments in Q3, increasing their Q4 shipments significantly. Red Dog only can ship a few months out of the year because of their Alaskan climate, so the Q4 spike in zinc supply is much bigger than normal this year. Because of weather conditions, about 50,000 tonnes of zinc in concentrate that was expected to be shipped in Q3 2006 was delayed to Q4 2006 and Q1 2007, with 25,000 additional tonnes of sales in each quarter

  2. There was a surge in zinc exports from China ahead of a December 14 deadline for the ending of export tax rebates. With the extra 5% rebate disappearing, apparently Chinese smelters drew down any inventory they had and exported all they could by the December 14 deadline. The rebate didn't end for the special high-grade zinc (99.995%+ SHG zinc), "which is required by the LME for delivery against its zinc contract," so most of the surge was probably lower grade zinc. The surge in lower grade zinc probably meant some users had less need for SHG zinc, and thus there was likely a resultant short-term decrease in orders for SHG zinc, which is now being reflected in the buildup of inventories in the Singapore LME warehouse.

We believe that the Chinese rebate surge will be absorbed by the market fairly quickly as the Chinese smelters drop back their exports and build back their inventories. On the other hand, the effect of the Red Dog shipment spike will last into Q1. However, with the previous pace of LME Zinc depletion at around 80,000 tonnes per quarter, the additional 25,000 tonnes from Red Dog in Q1 shouldn’t prevent the downtrend in LME inventories from resuming, albeit at a temporarily decreased pace. We expect the zinc crisis to become very evident after the effects of the Red Dog shipment spike have dissipated by the end of Q1.

After the short term surge in supply from these 2 temporary events is absorbed by the market, we expect zinc to remain very strong because of the dearth of sizable projects in the pipeline for the next few years combined with growing demand and depletion of reserves at existing mines. We believe the fears in the market that the recent short-term trend change in zinc LME inventories could indicate a permanent shift in the supply/demand situation are misguided, and we expect that to become apparent in coming months. If the downtrend resumes as we expect, we believe the only way the LME Zinc inventories will avoid complete depletion is with zinc prices increasing enough to curtail demand.

Real nice! Keep up the great work. Good work. Enjoyed the visit!
- 5
spaghetti alla carbonara
I considered myself as the professional in this theme, and did not think that I can find in the Internet something new. But having come on your site, I have understood, that I know nothing and it is necessary for me to study and study as much as possible.
- 7
spaghetti alla carbonara
Post a Comment

<< Home


December 2005   January 2006   February 2006   March 2006   April 2006   May 2006   July 2006   August 2006   October 2006   November 2006   December 2006   January 2007   February 2007   March 2007   April 2007   May 2007   June 2007   August 2007   October 2007   November 2007   May 2008   September 2008   October 2008   January 2009   February 2009   March 2009   April 2009   May 2009   June 2009   July 2009   August 2009   September 2009   October 2009   November 2009   December 2009   March 2010   May 2010   June 2010  

Great Trades Home    Email GreatTrades

Great Investments Blog     Great Investment Articles Blog

Disclaimer: Great Trades may have a position in all or some of the stocks discussed in this blog, but is not paid by any company to promote their stock. Great Trades contains opinions, none of which constitute a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. Great Trades does not provide personalized investment advice.

Seeking Alpha Certified

Enter your email address to subscribe:

Delivered by FeedBurner

This page is powered by Blogger. Isn't yours?