‘LME zinc’ refers to zinc traded on the London Metal Exchange (LME), where options and futures contracts for industrial metals are traded.
More specifically, LME zinc may refer to spot zinc prices or prices for futures contracts on the LME, as opposed to zinc prices on other metals exchanges.
LME zinc contract prices are quoted in US dollars, and may be settled via physical delivery between a network of LME approved warehouses around the world.
For this reason, LME zinc may also refer to inventories of zinc in LME warehouses. In addition to acting as a futures trading exchange and providing reference prices, the LME acts as a physical market of last resort for producers and consumers of a number of metals including LME zinc.
In other words, those in the zinc industry may sell LME zinc during oversupplied markets and draw on LME zinc inventories in the event of a zinc shortage. Some market watchers look to rising and falling inventory levels on the LME as one indicator of global supply and demand conditions. However, its important to note that physical delivery is the exception rather than the norm when it comes to the metal exchange.
The LME also publishes daily reference prices for zinc and other metals that are used by a number of market participants. Overall, the exchange is predominantly used to either hedge or take on price risk.
In early May 2016, Stefan Ioannou of Haywood Securities noted that LME zinc inventories had fallen below 400,000 tonnes, leaving supplies at roughly 10 days of global demand.
“It’s just a number, but it’s an optical benchmark at the very least,” he said. To put things in perspective, inventories have historically been as high as 1.2 million tonnes, and Bloomberg reported on April 11 2016 that LME zinc stocks were at their lowest level in nearly seven years.
The last time LME zinc inventories were this low was in 2005, at which point prices for the base metal spiked up to $2 per pound. That begs the question, why hasn’t a similar jump happened this time around?
“There is also zinc in off-market inventories, and the amount is somewhat vague,” Ioannou said. As with most metals traded on the LME, stocks held in warehouses tracked by the exchange are just one part of the supply picture.
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