Zinc, Aluminum Premiums to Climb on Scarcity, Macquarie Says

Premiums paid for zinc and aluminum in the U.S. probably will rise in the next few weeks because of the metals’ limited availability in the physical market, said Macquarie Bank Ltd.

Zinc premiums, added to the price of immediate-delivery metal on the London Metal Exchange, more than doubled in the past year to 6 to 7 cents a pound even as inventories swelled, Macquarie analysts including London-based Duncan Hobbs said in a report today. Much of the metal in LME-tracked stockpiles is unavailable for immediate use, according to the analysts.

“A lot of this metal, and other material held off-warrant, is tied up in carry trades, with the result that it is de facto removed from the physical market, contributing to rising premiums and, ultimately, lending support to exchange prices,” they said. “We expect the carry trade in zinc and aluminum will contribute to lifting spot market premiums further in the coming weeks, possibly towards 10?/lb delivered in the U.S. market.”

A carry trade involves a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango, when contracts with later delivery dates trade at higher prices than nearer-dated metal. Financing costs and expenses for storing metal influence profits on the transactions.

Highest Since 2004

LME zinc inventories are at 764,300 metric tons, the highest level since April 2004, exchange data showed today. They’re up 9 percent this year, heading for a fifth annual climb in a row. Almost three-quarters of the stockpiled zinc is held in U.S. warehouses.

The exchange’s aluminum stocks come to 4.56 million tons, with almost half held in the U.S. Inventories slipped 7.6 percent last year, the first drop since 2005.

Exchange rules limit the maximum amount of metal warehouses are obliged to release, according to the analysts, helping to keep metal tied up.

“In warehouses where total metal stocks have built up to hundreds of thousands of tons, it may then take many months or even years before all of this metal could be withdrawn back into the market,” Macquarie said. The bank predicted further deliveries of metal into warehouses.

The prospective launch of exchange-traded funds that are physically backed by zinc and aluminum may help to drive premiums upward and support prices, according to Macquarie. ETF Securities Ltd. said April 14 it plans to introduce exchange- traded products backed by the metals in the current quarter.