Half-mln tonne zinc position sparks jitters about hidden stocks

* One party has huge short position on LME

* Physical delivery to expose hidden stocks

* Bullish case for zinc undermined by large stocks

By Eric Onstad

LONDON, March 14 (Reuters) - Metals markets are nervous that nearly half a million tonnes of hidden zinc may be delivered on the London Metal Exchange next week, shaking a market unsure about the extent of further concealed stocks.

Investors who had bought into a bullish story about zinc may be particularly concerned since the appearance of the unforeseen inventories could weigh on prices of zinc, the top LME performer last year.

LME zinc stocks have declined by a third over the past 12 months, encouraging bullish investors, but analysts are uncertain about how much more inventory is stashed away in off-exchange depots in financing deals.

"It's a very real risk that we do see a very big physical delivery onto the LME at some point over the next week," said analyst Gayle Berry at Barclays in London.

"There has been, we think, a large accumulation of unreported zinc inventories, which could be mobilised to deliver against a large short futures position."

Barclays estimated that last year alone, about 600,000 tonnes piled up in unreported inventories while BMO Capital Markets this week cited reports that up to 1 million tonnes of hidden stocks are stashed away in Chinese bonded warehouses.

Unease on the market revolves around a huge short position on the LME March contract that accounts for at least 40 percent of futures for that date, according to LME data <0#LME-FBR>.

Based on open interest data, the position is equivalent to at least 448,020 tonnes, worth $881 million at the current price of the March contract of $1,966.50 a tonne.

EYES ON WEDNESDAY

The March contract matures next Wednesday, when short position holders either have to deliver physical metal, roll the contract forward or close it by buying equal amounts of futures.

Buying such a large amount of futures at the last minute would be difficult so if the short holder wanted to close out or roll, it would have likely already taken action, analysts said.

There have already been some 70,000 tonnes of deliveries over the past week into the LME New Orleans warehouse, the dominant location for zinc.

The reversal from withdrawals to deliveries has started ringing alarm bells, especially when investors looked at the potential for more deliveries by the short position holder, highlighting the issue of hidden stocks.

Zinc, mainly used to protect steel from corrosion, was the top performer last year on the LME and jumped nearly 9 percent during the month before arrivals began appearing in LME data.

The bullishness was due to views that the closure of large mines was tipping the supply-demand balance from surplus into deficit and the persistent stock declines was evidence of this.

"It (recent stock increases) perhaps suggests that the decline we were seeing in warehouse stocks was a little bit of an over exaggeration in the extent to which the zinc market is already in deficit," said Nic Brown, head of commodities research at Natixis.

"We believe the market is in a small deficit but it's not quite as aggressive a shortage as we may have perceived it to be by looking at the (previous) movement in warehouse stocks."

The LME does not identify large position holders, but some industry sources said commodity powerhouse Glencore-Xstrata is a clear possibility.

The trading and mining group is not only the biggest producer of zinc ore, but has interests in smelting and marketing of the metal.

When the group listed in 2011, it said it had control over 60 percent of the internationally tradeable zinc market in metal and 50 percent in concentrates.

Glencore's warehouse unit Pacorini is the biggest operator in zinc hot spot New Orleans, owning 60 percent of depots there.  

While taking a short position might go against Glencore's position as a producer, it is also known as a canny trader.

"If Glencore's trading business was of the view that market dynamics were likely to drive prices for a commodity down, they might well look to trade on that in order to profit from it. That's a cultural difference between Glencore and many other (mining) companies," an industry source said.

The short position might dovetail with some of their positions in other areas of the production chain, another source said. "They have such a substantial position in the zinc markets so they have many options..."

A Glencore spokesman was not immediately available for comment.

Copper prices below $5,000 could threaten Zambian mines - minister

Zambian mines are still operating profitably despite the fall in copper prices but could be threatened if the price dropped below $5,000 per tonne, Mines Minister Christopher Yaluma said on Saturday.

 

Copper markets have been edgy over slowing Chinese demand and fears that credit upheaval in the world's second-biggest economy could unwind financing deals using the metal as collateral.

 

Benchmark three-month copper on the London Metal Exchange has been falling steadily since January and sank to a 44-month low of $6,376.25 on Wednesday.

 

"Whatever they are making now is within very profitable levels. The worst case scenario they have planned for is falls below $5,000 and I don't think prices will reach that level," Yaluma told Reuters.

 

"They would only be threatened if prices fell well below $5,000."

 

Zambia produced 915,773 tonnes of the red metal between January and November 2013, up from 755,359 tonnes in the corresponding period of 2012.

 

Exports of the metal are a key supplier of Zambia's hard currency and the falling prices have brought the local kwacha currency tumbling nearly 10 percent so far this year.

 

 

Analysts polled by Reuters in January expect global surplus stocks of copper to tighten significantly this year and next as new mine output fails to translate into refined metal.

Crimea Names Ruble Currency; Applies To Join Russia, Expects To Become Russian Federation Region By Thursday

First, for those who have missed this weekend's developing story surrounding events in Crimea, here is the 30 second summary, courtesy of Bloomberg:

• U.S., EU warn Russia not to annex Crimea after 95.5% of voters backed leaving Ukraine to join Russia in referendum.
• Ukrainian govt, EU, U.S. consider vote illegal
• Russia said vote  “fully met international norms”
• Russia deployed about 60,000 troops along Ukrainian border, Ukrainian government said yday; Ukraine closed border crossings and will mobilize as many as 15,000 volunteers in next 15 days
• Obama spoke with Putin, said referendum would never be recognized by intl community; U.S. prepared to impose “additional costs” on Russia for its actions
• Putin told Obama Kiev regime unable to curb radical, ultra- nationalists groups that are destabilizing situation, terrorizing peaceful residents
• EU ministers meet today to discuss sanctions that target Russian individuals rather than businesses; EU leaders to meet March 20-21 in Brussels to discuss further measures
• “We are all reluctant to impose sanctions because Russia will probably respond and we’ll all suffer as a result,” Poland Foreign Minister Radoslaw Sikorski said on CNN. “But Russia is leaving us with no choice.”
• Russian lawmakers to consider bill on March 21 that would allow Russia to incorporate parts of countries where residents want to secede, says a Kremlin adviser
• Russia vetoed UN Security Council resolution declaring referendum illegal; China abstained from voting
• Crimeans celebrate vote

And here is the latest : just hours ago, Crimea's parliament officially applied to become part of Russia. The parliament "made a proposal to the Russian Federation to admit the Republic of Crimea as a new subject with the status of a republic," according to a statement on its website. A Crimean parliamentary delegation was expected to arrive in Moscow on Monday to discuss the procedures required for the Black Sea peninsula to become part of the Russian Federation.

"If everything’s signed we’ll become a fully fledged region of the Russian Federation Wednesday or Thursday,” First Deputy Prime Minister Rustam Termigaliyev says in interview at govt headquarters in Simferopol. Termigaliyev added that Crimea will promptly get $1b aid from Russia in near-term, and that Hryvnia reserves enough for 10 days, then Crimea will switch to ruble. April pensions “most likely” to be paid in rubles. Crimea can be self-sufficient in natural gas after today’s nationalization of Chernomoreneftegaz. Crimea risks 150,000 hectares being left without water if Ukraine shuts off supply, though that’s “not critical,”  says Termigaliyev.

In other news, the west continues dithering and considering just how best to telegraph to the world that it is completely helpless in stopping the annexation of Crimea, which is now a fact, and that it is praying that Putin does nothing to annex any of the other Pro-Russian cities in east Ukraine in the coming days, as once again, it has absolutely no stopping power with Putin continuing to hold all the chips.

Want to know more? then you will have to wait until tomorrow, when Putin will address a joint session of parliament on Crimea on Tuesday, the Kremlin's representative to the lower house said.

The Kremlin press service did not immediately confirm Putin would address the session of the State Duma lower house and the Federation Council upper chamber.

But Garry Minkh, the Kremlin's representative in the State Duma, told reporters the president would deliver a speech to the joint session following Sunday's referendum in which Ukraine's Crimea region voted to join Russia.

Putin Responds To US, European Sanctions: Signs Order Recognizing Crimea As Sovereign State

So much for de-escalating. From the Kremlin:

Vladimir Putin signed a decree "On the recognition of the Republic of Crimea." Full text of the Decree:

1. Given the will of the people of the Crimea on the referendum held on March 16, 2014, to recognize the Republic of Crimea, in which the city of Sevastopol has a special status, as a sovereign and independent state.

2. This Decree shall enter into force on the date of its signing.

Surely this will precede Putin's own executive order recognizing Crimea as the latest member of the Russian Federation.

One also wonders: how long until Russia freezes all assets of McDonalds restaurants operating in Russia.

Five major copper mines to begin operations in Peru by 2016

Five major copper mines, with an estimated investment of $13 billion, are expected to begin production in Peru before 2016, upping the country’s output of the red metal from 1.3 million tonnes last year to 2.8 million tonnes.

According to data provided by the Minister of Energy and Mines (MEM), and quoted by Gestión, the first one to begin mining is Hudbay Minerals' (TSX:HBM) $1.55bn Constancia project in Cusco, scheduled to start in August.

Next year three other projects should come in stream: The $5.2 billion Las Bambas in March, Freeport McMoRan Copper & Gold's (NYSE: FCX) $4.4bn expansion of its Cerro Verde mine in August, and US miner Southern Copper’s (NYSE: SCCO) Toquepala $900 million expansion in July.

Southern Copper is also expected to finish work at its controversial $1 billion Tía María near Arequipa in March 2016.

Copper, however, is by far the worst performer among metals so far this year and its fate is a real concern now. The red metal has already dropped 13% and futures dipped 9% last week to $6,380, from recent highs of $7,220 over the last few sessions, the lowest level since June 2010.

Global copper producers —being Chile's Codelco the largest, followed by Freeport-McMoRan, Glencore Xstrata and BHP Billiton— plan expansions of mine capacity that would add between 1.1m tonnes and 1.3m tonnes of copper per year to the market until 2016.

Such increases would be roughly equivalent to the annual output of Chile's Escondida, the world’s largest mine, which provides about 5% of  the world supply.

Peru’s steady growth in recent years has been largely driven by mineral production. Last year the country injected $9.7 billion to the local economy coming from mining, jumping 14% when compared to 2012.

Authorities has said they expect to reach similar levels by the end of this year, as there is still there is plenty for everyone to get a descent piece of the resources pie. Peru holds 13% of the world's copper reserves, 4% of gold, 22% of silver, 7.6% of zinc, 9% of lead and 6% of tin reserves, show official figures (in Spanish).

LME copper slips, eyes biggest weekly fall in 11 months

* Nickel prices near 11-month highs on Russia supply worries


* Bonded China copper premiums steady for fourth day at $120-$150-Shmet

* Next week: U.S. industrial production, FOMC meeting

London copper edged down on Friday and was on track for its biggest weekly loss since April 2013 on expectations of ebbing demand growth in top user China, while risk aversion over escalating tensions in Ukraine also dampened sentiment.

Copper prices have shed 9.1 percent in the past week, as short-selling escalated on a downbeat China view.

"Things aren't really looking good in China right now and that bearish sentiment may continue to push down (industrial) metals prices across the board," said Tim Radford, analyst at Sydney-based advisory firm Rivkin, adding that a break of support around $3 a pound (6,600) could ignite fresh momentum-based selling.

"That said, six to 12 months down the road, is China going to be in a worse spot than it is now? Probably not. In the short term it's looking a bit overdone," Radford added.

Three-month copper on the London Metal Exchange eased by 0.14 percent to $6,405.75 a tonne by 0206 GMT, after losing 1.4 percent in the previous session. The contract was on track for a weekly fall of about 5.5 percent.

LME copper sank to a 44-month low of $6,376.25 per tonne on Wednesday.

The most-traded June copper contract on the Shanghai Futures Exchange fell 1 percent to 44,140 a tonne, having earlier hit 44,020, close to Wednesday's trough of 43,660, which was its lowest since July 2009.

But suggesting a floor may be forming, physical premiums for copper in Shanghai's bonded zones have steadied for a fourth day at $120-$150 a tonne, according to China price provider Shmet, while some physical traders have begun to turn buyers in the market. 

"The interest is finally coming in on the cathodes and the copper scrap side. That’s a good sign," said a physical trader in Singapore. "When that happens on copper that to me tends to indicate a bottom nearby."

Chinese funds taking massive short positions played a powerful role in copper's slide this week, signalling the growing force of the sector in global commodities markets.Growing jitters about the financial health of bloated industries in China have prompted many banks to cut lending in these sectors by as much as 20 percent, banking and industry sources with knowledge of the matter said.

Alongside steel, China's leaders have pointed to the aluminium market as having surplus capacity that needs to be cut.

Dampening sentiment in wider markets, Russia launched new military exercises near its border with Ukraine on Thursday, showing no sign of backing down on plans to annex its neighbour's Crimea region despite a stronger than expected drive for sanctions from the EU and United States. 

Worries that sanctions on Russia may disrupt nickel shipments have helped nickel prices gain 3 percent this week to 11-month highs of $15,860 a tonne, although prices had edged back to $15,740 a tonne on Friday.

Citi: Is This Gold's Breakout Week?

Precious metals (gold in particular) continue to push higher and along with copper (to the downside) hold 'center-stage' among world commodity markets. As Citi's FX Technicals group notes gold has traded above very strong resistance on the $1,350 to $1,362 range suggestng a test up to $1,434 and the next level at the 200-week moving average at $1,493. Gold is also getting close to the "golden cross" where the 50DMA will cross above the 200DMA. Such a move, if seen, would strongly suggest that the corrective low is in (at $1,182) and that a re-test of the all-time highs at $1,921 and beyond is highly likely.

Gold weekly chart: Is this the breakout week?

Gold has traded above very good resistance in the $1,350 to $1,362 range
– $1,350: 55 week moving average
– $1,353: Top of channel from the 2012 peak
– $1,362: Peak of bounce seen in October 2013.

A weekly close above this range would open up the way for a test of the pivotal double bottom neckline at $1,434. A weekly close above this latter level would complete the double bottom and suggest extended gains towards $1,680-1,685. Such a move would take us back above both the 200 week moving average at $1,493 and the horizontal resistance (previously support) from 2011-2012 at $1,523-1,527.

Such a move, if seen, would strongly suggest that the corrective low is in (At $1,182) and that a re-test of the all-time highs at $1,921 and beyond is highly likely.

Where The Russian Troops Are "Pre-Takeover" Infographic

Crimea is last week's story. Now it is all about east Ukraine. In that vein, moments ago John Kerry's latest stand up comedy routine hit the tape which contained, besides the usual laugh lines, this particular pearl:

• KERRY SAYS RUSSIA DOESN'T YET HAVE FORCES FOR UKRAINE TAKEOVER

Is that so? We provide this map showing the latest distribution of Russian military forces on the Ukraine borders so that readers can make up their own mind.

And here is another map compiled by Dmitry Tymchuk, a former Ukrainian military officer, who has established an organization, the Center of Military and Political Research on Kiev, to effectively collect and gather data about military-related facts.

Kerry concluded:

• KERRY SAYS `CONTINGENCIES' IF RUSSIA MOVED INTO EAST UKRAINE

We'll know just what those are by Sunday night. The only question: will Referendum Sunday be the new Lehman Sunday...