Zinc had been shaping up as one of the bright spots in commodities. But news late last week suggests that the current downtrend in the zinc price may get worse before it gets better.
According to a report from Reuters Friday, major zinc producer Glencore may be dumping zinc metal on the market. Making a price recovery very difficult in this market.
Here's the notable thing: zinc inventories at the key LME warehouse in New Orleans have surged 43 percent since the beginning of August -- to nearly 609,000 tonnes. Related: Iran Deal May Redefine The Middle East
And that warehouse is dominated by supply from Glencore. With the major owning two-thirds of the delivery depots in New Orleans.
It makes sense that this big inflow of metal would be coming from Glencore. With the firm saying last month that it wants to cut its marketable inventories of metals by up $1.5 billion.
Glencore's inventories include large amounts of zinc concentrate and zinc metal. All of which suggests that the major may be liquidating its zinc holdings through sales in New Orleans. Related: Which Shale Firms Will Cut Production?
If that is the case, it has major implications for the zinc price. A full $1.5 billion is a lot of metal to hit the market -- with these sales likely playing a role in the nearly 8 percent decline the zinc price has seen over the last 10 days.
More concerning is the fact that Glencore's overall inventories total an incredible $23.6 billion worth of metal. And with the company moving to shore up its balance sheet, more of this supply could be sent back to the open market over the coming months, or even years.
This will be a weight on the zinc price -- which has now dropped over 30 percent since it hit a May high of $1.10 per pound. Today, zinc is actually selling near a five-year low. Related: Peak Oil Has More To Do With Oil Prices Than You May Think
That's a stark contrast to the bullish arguments a year ago -- which said zinc would soar, as several big mines around the world closed for good.
The Glencore sales of course won't be a permanent headwind. So it may be wise to hold off on big moves in this space until the company shows signs of having completed its sales program.
Here's to zinc-ing it through,
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Dave Forest
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