Commodity trader Glencore is tightening its grip on the global zinc market by moving material to inaccessible locations, forcing industrial users to pay high physical premiums for a metal that is in surplus.
The matter is under scrutiny because Glencore, which controls 60 per cent of the world's zinc trade, is using warehouses monitored by the London Metal Exchange (LME) to stow away the metal and support premiums, sources told Reuters.
The LME, the world's biggest metals marketplace, has come under strong criticism recently because metal sitting in some of the warehouses that it monitors is unavailable in practice, backlogged in some cases for up to a year.
The criticism has centered on the bottlenecks in aluminum, and the LME has introduced new rules recently aimed at combating the problem. But the matter of unavailable metal persists, and is arguably getting worse.
Glencore's tactics, however, do not contravene any market rules and are seen by many as legitimate business practice.
Latest LME data shows a sharp increase in zinc inventories in New Orleans, a dead-end destination for the galvanizing metal not because of backlogs, but because it is out of reach of industrial hubs, even in the United States.
In fact, more than 80 per cent of the 196,000 tonne increase in zinc stocks since late last year has been in New Orleans, with around 30,000 tonnes arriving in the last two weeks alone at the location that already holds two thirds of LME zinc stocks.
"Glencore has always controlled zinc in Europe. They don't want a surplus there, they want higher premiums, so they're shipping all the surplus from Asturiana de Zinc (in Spain) to New Orleans, where no one wants it," said a London-based source.
Glencore declined to comment.
LME data shows the Swiss-based commodity trader owns slightly less than half the warehouses in New Orleans through its Pacorini subsidiary. The warehousing business, thanks in part to the specifics of the LME system, is becoming very lucrative.
The LME is set up as a market of last resort, meaning there is always a buyer for every seller. In other words, when the zinc arrives in New Orleans, Glencore as the owner of the metal always has the option to sell it.
In market parlance, this is called putting zinc warrants or ownership titles 'back in the clearing'.
The crux is that this type of selling, in zinc at least, leaves market balances tight and premiums high, as market players are loathe to pay to ship metal from New Orleans to a more convenient location.
Moreover, this kind of selling allows Glencore, as a warehouse owner, to collect lucrative rent from any counter-party to an LME trade that gets dumped with New Orleans zinc warrants.
"Glencore is moving zinc to New Orleans, putting it back on warrant and collecting rent. They're not trying to build a queue necessarily, they don't really need to as the metal is not going to get out of there," said another London-based source.
Premiums - the amount paid over the LME cash price for physical metal - are currently at around $130-135 a tonne for zinc in Rotterdam. By contrast, premiums for copper, a metal in deficit which trades at four times the price of zinc, are only at around $70-80 a tonne.
Sources said that while Glencore has sold some of the zinc warrants in New Orleans, it is at the same time holding onto a fair portion of the others because of its long-term punt on rising zinc demand.
The punt is not outrageous. Miners have been betting that the zinc market will be in a deficit within five years as old mines run dry, resulting in massive investment in new zinc projects lately.
Should this view transpire, premiums for physical zinc would likely shoot up even further, with customers forced to pay extra even for zinc located in inaccessible places such as New Orleans.
Taking the view that it will be able to profit from a rise in zinc prices, Glencore agreed in February to buy zinc concentrates from Peruvian miner Volcan without even charging for processing the metal.
The risk, however, is that should demand recover strongly, premiums could shoot up, resulting in hundreds of thousands of tonnes of zinc held in warehouses suddenly flooding the market, stemming a price recovery or even spurring a crash.
"What will happen when financial markets return to a healthy state? What will happen to volumes in bonded in warehouses? Will they run into the physical markets? What will happen to the premiums then? It is a game that will end one day," said a Europe-based physical zinc trader.