Why I Expected LME Zinc to Converge

Executive Summary#

Trade Structure#

The Dislocation#

Zinc was priced very differently across two connected markets.

LME availability had become exceptionally tight. On-warrant stocks represented less than one day of estimated global consumption, and backwardation reflected the premium buyers were willing to pay for immediately deliverable metal.

China, by contrast, held materially more refined zinc. The original work estimated approximately 162,000 tonnes of inventory and a weak domestic balance. On 24 October, the SHFE/LME ratio was approximately 7.35, and exporting standard high-grade zinc to LME warehouses in Singapore was estimated to generate an arbitrage profit of roughly CNY1,128 per tonne, or around $160.

The variant perception was that the LME squeeze was real but temporary. Once the price premium became large enough to cover freight, financing and warehouse costs, the market itself created the incentive to move metal westward.

Convergence Mechanism#

The expected sequence was:

1. LME scarcity pushed nearby prices and backwardation higher.
2. The widening regional premium made Chinese exports profitable.
3. Metal was shipped toward LME-approved Asian warehouses.
4. New warrants increased visible availability.
5. The scarcity premium and backwardation weakened.
6. LME zinc converged toward the better-supplied Chinese market.

An early 2,500-tonne arrival in Singapore provided initial evidence that the mechanism had begun. The investment question was not whether China possessed metal, but whether the flow could arrive before the short squeeze imposed unacceptable mark-to-market losses.

What Went Wrong Initially#

The timing was too aggressive.

By 5 November, LME three-month zinc had risen to $3,057.85/t. Rather than collapsing as soon as export economics opened, the scarcity premium intensified. Participants short nearby metal still needed to secure deliverable supply, and physical logistics moved more slowly than the financial market.

LME stocks had increased to approximately 29,500 tonnes, but the rise was too small to break the squeeze. The position therefore experienced a paper loss of approximately $38/t in its first ten days.

This was a useful distinction between a correct mechanism and a tradable catalyst. The existence of an arbitrage does not determine the speed with which ships, customs, warehouse queues and warranting processes resolve it.

Evidence of Convergence#

The trade improved as the original holding period matured.

Measured from the recorded entry to 20 November, the short moved approximately $38.50/t in the intended direction, before transaction costs and financing. More importantly, the inventory rebuild confirmed the physical mechanism.

Risks and Invalidation#

The appropriate invalidation was not simply a higher LME price. It was evidence that export economics had closed without meaningful warehouse inflows, or that the expected metal could not become LME-deliverable.

Outcome and Reflection#

Research Methodology#

The historical prices and stock observations above are taken from the contemporaneous Queen’s Tower Capital monitoring decks. LME public data explain the methodology and role of official prices and warehouse-stock reporting, but full historical series are generally licensed. Current LME figures are not used to judge the original four-to-six-week outcome.

Sources#

• London Metal Exchange — LME Zinc
• London Metal Exchange — Official Prices
• London Metal Exchange — Warehouse and Stock Reports