(The opinions expressed here are those of the author, acolumnist for Reuters.)
* Options open interest by month: https://tmsnrt.rs/2q9NoKP
* Call options by strike: https://tmsnrt.rs/2q2M6RC
By Andy Home
London Metal Exchange (LME) zinc for three-month deliveryhit a 10-year high of
Since then zinc has been dragged lower in the broaderrisk-off pull-back in the industrial metals space and iscurrently trading either side of the
Analysts, such as Max Layton of Citi, believe there is stillthe potential for one last leg higher to
But time is running out. "The zinc price in the next threeto six months is the best we're going to see for the next threeto five years," he told last month's Metal Bulletin ZincConference in
The LME options market seems to agree, judging by theconcentration of bull positioning over the next three months.
Thereafter, open interest drops off sharply until December,when bearish views predominate.
The consensus, it seems, is for zinc's bull cycle to peaksooner rather than later before a multi-year down cycle.
But zinc confounded the bulls several times on the way up.Might it equally confound the bears on the way down?
Graphic on LME zinc options open interest, calls and puts,through December: https://tmsnrt.rs/2q9NoKP
Graphic on LME zinc call options by major month and majorstrike: https://tmsnrt.rs/2q2M6RC
ALL OVER BY JULY?
The landscape of options positioning in the zinc marketcan't tell us where the price is going, but it does give a fairidea of where the market thinks the price might be going.
And in the short term the market still seems to becollectively bullish.
The number of call options, which confer the right to buy,dwarfs the amount of put options, which confer the right tosell, in April, May and June.
The April options expire today but as of last night's closethere were 9,006 lots (225,150 tonnes) of call option openinterest versus just 4,503 lots of put open interest.
The upside skew is even more extreme in June with 18,349tonnes of open interest on calls versus 4,301 lots on puts.
The June market positioning is clustered on three mainstrike prices, namely
The very highest strike price open is
After June, however, options open interest falls off a cliffup to December, which tends to be a liquid month for optionspositioning in any given year.
And although there are 4 lots of wildly optimistic calloptions open on the
The market, in other words, appears to agree with the viewof Citi's Layton and other analysts.
If there's going to be one last bull hurrah, it's going tohappen by July, after which options open interest and bullexuberance both plummet.
CENTURY THE NEW DISRUPTOR
This narrative of one last price peak is predicated on abuilding supply response to recent high prices.
The International Lead and Zinc Study Group (ILZSG) expectssome 880,000 tonnes of additional mine supply to enter themarket this year, according to Joao Jorge, the Group's directorof market research, speaking at the same
The ILZSG is forecasting mine production growth toaccelerate from 3.6 percent in 2017 to 6.0 percent this year.
The mine surge will result from a combination of restarts,such as that announced by Glencore last Decemberand new mines such as Vedanta's Gamsbergproject in
The single biggest addition to global supply, however, willcome from the Century zinc mine in
Century closed in 2015 but New Century Resourcesaims to produce zinc concentrates from the old tailings at themine site.
The company is guiding towards a restart of activity in thethird quarter of this year with a one-year ramp-up to fullcapacity of 264,000 tonnes per year of contained metal. That'saround half of what Century was capable of producing in itsheyday.
Century, it's worth remembering, repeatedly dashed bulls'hopes in the long build-up to this year's high prices by stayingopen much longer than expected.
The very fact it is coming back at all is astonishing, butwill new Century, like old Century, spring more surprises on theunwary, this time by taking longer to ramp up than expected?
If you're looking to the concentrates part of the market foran answer, you're in for a disappointment.
This year's benchmark treatment charges for the processingof concentrates into metal should provide some insight into thestate of play in the raw materials segment of the supply chain.
But after two fruitless rounds of meetings smelters andminers are still far apart on how much new supply to expect andhow quickly to expect it.
WHAT'S IN
Uncertainty around these changing supply dynamics this yearis going to remain a key unknown for many months.
A more immediate threat to the zinc consensus might comefrom visible stocks.
LME inventory has fallen from almost 900,000 tonnes in 2012to a current 209,500 tonnes, just about all of it in the
The occasional "arrival" of more zinc in LME warehouses inthe city, such as the 79,000 tonnes that were warranted in asingle day on March 2, has unsettled the market.
There's nothing new to this
Quite evidently, if more zinc miraculously turns up in
There again, with only 143,225 tonnes of LME stocksavailable, the
Maybe that's what the bull with the December calls on the
No-one else is, though.
(Editing by Louise Heavens)
