Zinc is experiencing another "short squeeze": available inventory is less than one day's supply, and spot premiums have soared to their highest level since 1997!

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The zinc market on the London Metal Exchange (LME) is facing its most severe squeeze in decades, with traders scrambling to grab the increasingly depleted stocks that support exchange contracts, pushing spot zinc prices to the highest premium levels in more than 20 years.

The latest market dynamics show that the premium of spot zinc over the three-month contract has soared to $323 per ton, the highest level since at least 1997. This phenomenon, where near-term contract prices exceed longer-dated ones, is known as "backwardation" and is a typical sign that spot demand exceeds immediate supply.

Prior to this price movement, LME data showed traders accelerating purchases of the remaining stocks. Six independent entities hold large long positions in LME inventory and contracts expiring within two days, with a total corresponding metal amount at least three times the immediately available stocks in the LME storage system.

This intense price volatility not only puts tremendous pressure on short sellers to close their positions or deliver physical metal, but also highlights the fragility of supply in the global physical market. Analysts believe that in the absence of new metal inflows attracted to LME stocks, exports from China may be key to easing short-term market pressures.

LME Stocks Critically Low, Less Than One Day of Supply Available

The root of the current squeeze lies in the continued depletion of LME inventory. As multiple Western smelters cut production after processing margins collapsed, zinc stocks in the LME warehouse network have plunged to near the historic lows set in 2023.

Data show that currently, only 24,425 tons of zinc are available for buyers to extract from LME warehouses. For a global market with annual consumption of 14 million tons, this amount of inventory isn't even enough to satisfy one day's demand. Duncan Hobbs, Head of Research at Concord Resources Ltd., said:

"Stocks are at extremely low levels, and the physical market outside China feels delicately balanced, which makes the market susceptible to the kind of shocks we are now seeing."

Bulls in Control, Shorts Face Risk of Loss

The huge long positions shown in LME data mean that sellers holding short contracts who cannot deliver physical metal may face heavy losses.

The "Tom/next" spread, which reflects the cost of rolling a position forward one day, hit $30 per ton this Tuesday, the highest since a historic squeeze in 2022. Al Munro, Senior Base Metals Strategist at Marex, said, "The LME warrant holdings report shows some significant long positions," while adding:

"The reality is, LME’s backwardation has yet to attract significant physical and stock inflows."

In sharp contrast to Western smelter output cuts, Chinese smelters have maintained production, resulting in a sharp price gap for zinc between the LME and the Shanghai Futures Exchange (SHFE).

To capitalize on this arbitrage opportunity, some Chinese smelters are planning exports. While this may not fundamentally resolve the inventory shortage, it could offer some short-term relief to buyers urgently seeking metal on the LME market.

Risk Warning and DisclaimerThe market involves risks, and investment should be made with caution. This article does not constitute personal investment advice and does not take into account the individual objectives, financial situation, or needs of any specific user. Users should consider whether any opinions, views, or conclusions expressed in this article are suitable for their particular circumstances. Investing based on the information herein is at your own risk. ```