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8/21/17

Think zinc (part X + 1), from IKN431

About a page and a half of yesterday's IKN Weekly IKN431 was dedicated to an update on the zinc market. Here's that piece, the only change being the last section in which we discuss the state of play in the three stocks chosen to ride the Zn upwave, plus the new one I'm thinking of buying soon(ish).



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Think zinc (part X+1)
There have been several pieces in ‘Market Watching’ this year with ‘think zinc’ in the title this year, so it’s pleasant to report that the macro thoughts behind the trade idea are panning out pretty much the way imagined. The basic idea has been one that we first identified back in early/mid-2016, but its sense of urgency is now increasing. It’s all about dwindling supply in the face of demand growth, the way that will push prices higher and the tell on all this would be a sharp drop in world inventory levels at the major metals exchanges. That’s worked out just right and I believe we’re now approaching the tipping point.

To recap slightly, in IKN419 (one of the better examples of ‘think zinc’) dated May 28th 2017 we highlighted how overall world zinc stocks had dropped to 524kt, down 30% in 2017 to that date. Here’s a chunk of script from IKN419 by way of reminder:

“…the real news is the London Metal Exchange (LME) and Shanghai Futures Exchange (SHFE) date. LME zinc inventories have been dropping for quite a while and went under (what is understood to be) the key 400k tonnes level at the beginning of the year. But the new news is the sudden acceleration of SHFE inventory destocking. Last week alone SHFE stocks dropped 14.7% to 78,300mt and according to Metal Bulletin last week, premiums for zinc delivery in China are at three year highs. Overall world Zn inventories are now 524k, down 30% in 2017 alone and put this weekend’s inventories at 11.75 days of consumption (i.e. there’s less than 12 days’ world zinc supply in the storage rooms of this world). That was 19 days at the start of 2017 and it’s closing in rapidly on what most Zn market-watchers consider the pinch point of 10 days. The way in which stocks have dropped like a stone in May means the crunch moment may now come more quickly than most people (including myself) were expecting. Up to now I’d mentally pencilled in Q3 or Q4 of 2017 for the time the Zn hype machine starts, instead it may come as soon as June.”

Cut to today and though the crunch moment didn’t arrive so quickly, the trend has continued and we’re now at 447kt, 41.1% down YTD. That puts stocks at 11.4 days of world consumption and that suggests there’s more upside to come from Zn, we haven’t reached the mania phase yet because as noted in IKN419 the classic trigger point for (something akin to) panic buying is when days of consumption drops under 10. When (not if) that line in the sand is crossed it might not faze real users so much but I’ll bet dollars to donuts the mining sector hype machine will crank it up and draw newcomers/latecomers in.

With that in mind and to ring the changes slightly (perhaps matching with the longer-term thoughts on gold in this week’s intro) I thought I’d look up a very-long-term chart of the metal today. After a quick Google rummage this elegant one at (20), Trading Economics (interactive too, I will return there) turned up that takes us all the way back to 1960:




Though the 60s were another country for base metals trading and flat, as from the mid-70s and for disparate reasons, one thing we can note about zinc is the way it will rally on a spike. The most notable and famous being the mid-2000s run that took it to U$2/lb briefly, but even the 1989 run made for a bottom-to-top run of +150%, anyone buying low and selling high then would have done just fine.

Will we reach $2/lb this time? I doubt it, the period before the financial crisis was weird in many ways and bubblemania spreading out from the house price boom was infecting many secondary markets. On the other hand, after last week’s breakout over U$1.40/lb (U$3,100+/tonne now) I see no reason why the rally should grind to a halt. And as mentioned above, the trade media hasn’t even clicked into “Supply Crunch!!!” hype mode yet.

Personally I’ve been playing the run with three trades up to this week but with....

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And the rest is for subbers.