Previously, I wrote an article on the exploitation of zinc and aluminum via warehouse manipulations by bankster vigs or middle men ["Zinc and Aluminum Exploited by Middlemen Vigs"]. This has resulted in large warehouse inventories combined with shortages for users and fabricators. Apparently the timing of my article was on the money because shortly thereafter the London Metal Exchange, under severe pressure from end users like Millers Coors and Novelis, adopted some new rules to loosen up the queues ["LME Beefs Up Powers to Tackle Queues"].
The main component of this new policy seems to center around a 50-day queue limit. The tone of fabricators in the Reuters news story was hopeful; but as they say, "I'm from Missouri" (the show me state). When I spotted this story, I thought it might signal a partial attempt to force the vig players to fulfill orders with a shorter delay. In other words, a half measure.
The LME also said it had started a legal review of what steps it can take on high storage charges including rent, and is looking with lawyers at the effectiveness of the agreement it has with warehouse companies. The LME urged warehouses to show self-discipline in terms of rents, but warned the firms it would consider using its new powers to cap rents if they were hiked in response to the new rules.
"Novelis Chief Supply Chain Officer Nick Madden, one of the LME's fiercest critics, welcomed the plan. 'At first review, the rule changes outlined by the LME appear to be a significant step in the right direction,' he said. But some say 50 days is still too long to wait for metal."
Now there are new developments that suggest this warehouse racket may be winding down even faster. It appears that Goldman Sachs (NYSE:GS) has put its metals warehouse units up for sale, Reuters reports. Goldman Sachs has 29 of the 37 registered sheds at Warehouse Metro in Detroit. I believe this is in response to the LME rules and backdoor suggestions or pressure brought to bear from the U.S. Federal Reserve, which announced a "review" of Wall Street's role in physical commodities trading in July. JP Morgan already announced they were exiting earlier in the year.
What is also interesting about the Reuters story is the mention of Chinese firms Ping An and Minmetals as potential buyers. I doubt if the Chinese have an interest in Detroit warehouses and believe this is designed to get China's end users access to the large zinc inventories.
Since this is for industrial use rather than hoarding and gaming, the inventories seen in the LME warehouse could evaporate fairly quickly and right as mining supply shuts down (see my previous article for a discussion of production). The lead time on new mines is a half decade and nothing is in the works or will be until zinc prices move higher. Zinc mining is concentrated in six counties and often comes in polymetallic deposits as a byproduct of silver or copper. A favorite play of mine in the sector is Bear Creek ["Loaded to Bear on Bear Creek"], which holds a large late-development stage and permitted silver-zinc deposit in Peru.
In the past, China's construction industry has tried to cut corners and use cheap material [see "Yes, China is Truly Different"]. Zinc is used in galvanisation, which is the process of applying a protective zinc coating to steel or iron in order to prevent rust. As China pushes for higher quality materials and repairs shody construction, zinc will be a key component.
The tell of what is really happening with the handoff to a new warehousing regime will be the warehouse inventory levels of zinc at the LME. If the 50-day queue is in effect, we would expect to see a gradual and steady drop off. Indeed, that is what is happening lately. If Chinese firms get the Goldman Sachs and JP Morgan warehouses, this drop off will accelerate. If interest rates or financing costs spike, then the ability to finance inventories will be affected and levels will fall further and faster. Finally, as zinc mining production is depleted by 10% to 15% over the next year or two, warehouse levels will crater.