CANCUN, Mexico Zinc
premiums look set to reach record levels in the next few months
and could result in increased downside risk to London Metal
Exchange tags, according to Macquarie Capital Securities Ltd.
analyst Duncan Hobbs.
"Well see zinc premiums
head towards 10 percent as a percentage of overall price in
some locations," he said. "Rising premiums impact the breakeven
price-cost calculations and may increase downside risk to
exchange prices in a declining market since smelters can afford
lower prices, if offset by higher premiums before cutting
The historic price-to-stock
relationship has broken down and might not be restored for some
time, Hobbs said.
"Zinc premiums and LME prices
tend to trade together. But more recently the exchange price is
flatter while premiums have continued to rise, creating a
disconnect," he said.
Special-high-grade (SHG) zinc
premiums in the United States are at 7.5 to 8.5 cents per pound
($165 to $187 per tonne), while those in Europe are at 5.9 to
6.4 cents per pound ($130 to $140 per tonne). The cash SHG zinc
contract closed the LMEs official session at $2,084 per
tonne Feb. 27, up 0.6 percent from $2,072 per tonne a day
earlier but down 1.8 percent from $2,122 per tonne a week
It has been the same for
aluminum, Hobbs added, with the higher premiums making a
considerable difference to the profitability of aluminum
P1020 aluminum premium is trading at 11.3 to 12 cents per pound
compared with 8.1 to 8.6 cents at this time last year.
Rising premiums will also
"reduce the efficacy of price risk management, as it becomes
more difficult to manage the premium price risk," Hobbs
Markets can be "foggy" as
premiums rise as a proportion of price, since premiums
arent as transparent as LME prices.
"Producers may be more tightly
bound to particular counterparties," Hobbs told attendees of
the International Zinc Association conference in Cancun,
Sharply rising zinc premiums
might encourage miners to bring this into value-sharing
calculations when negotiating treatment charges, he said.
Aluminum and zinc premiums have
been driven by the "addressable market balance," or the amount
of metal that is freely available to buy, Hobbs said.
Queues for getting metal out of
LME-listed warehouses in certain locations have helped tighten
availability of aluminum and, more recently, zinc.
"The LME is, in principle,
intended to be a market of last resort for producers and
consumers. But in practice, the LME has sometimes become a
market of first resort for producers and of no resort for
consumers," Hobbs said.
LME-registered warehouses in New
Orleans account for about 90 percent of the zinc stock built up
over the past few years, he noted.
But the bigger queues are
currently elsewhere: the wait for getting metal out of
LME-approved warehouses in Detroit is roughly 556 days, Hobbs
estimated, while the average for aluminum from warehouses in
Vlissingen, the Netherlands, is 696 days.
To address this issue, the LME
has changed its rules to increase the amount of metal sitting
in queues to be delivered out.
But access to dominant metal
stocks in critical mass locations will remain problematic,
"This rule change will make no
difference to access to dominant metal stocks in critical mass
locations, such as aluminum in Detroit and Vlissingen, and zinc
in New Orleans, although it should increase access to other
metals, including copper and lead," he added.