The Last Battleground You'd Expect To Find Zinc: New Orleans
There's a lot of different metals to find in the Big Easy: gold, as in the uniforms of the Saints and the bling that adorns the necks of well-endowed ladies on Bourbon Street; steel, as in the millions of tons of freight imported into the nation's largest harbor; silver, as in the remnants of the Confederate Mint that could only forge coins for two years before turning to rapid-inflation paper cash; and a newcomer to the party: zinc. Lost under the list of a dozen other metal commodities and a dozen other major cities, zinc and New Orleans have developed an odd confluence in 2015 because of the amount of of the shiny gray metal waiting for delivery. It's a delivery that few want: stockpiles of zinc in New Orleans have risen to a quarter of a million tons. When that metal hits the market, it's going to create a crash that short-selling investors can make ample profit on.
The World's Biggest Warehouse
Hurricane Katrina did a major number to New Orleans, but the destructive force couldn't stop the shipments from rolling in to the harbor. Since New Orleans has the connection to the mouth of the Mississippi River, it serves as both an outflow for cargo going down and a staging point for cargo going up. While we think of a major metropolis like Los Angeles or New York as being the center for imports and exports -- they're right across the ocean from China and Europe, after all -- the Port of Southern Louisiana and the Port of New Orleans (two ports in one city) take in twice as much freight as New York and almost five times as much as LA. The port is so important that during the Civil War the capture of New Orleans was a major strategic initiative by the Union Navy. Most famously, Union General Benjamin Butler ordered that all rebellion-inclined women of New Orleans could be treated as prostitutes; the women responded by crafting chamber pots with his face in the bowl. The federal government awarded the rights to the national World War II museum to New Orleans because of the construction and supply of the "victory fleets" we mass-produced in order to overwhelm both Germany and Japan on the high seas. Today, New Orleans offers both ample space for ships to unload as well as cheap land for storehousing due to the Katrina disaster. The open tonnage of metals alone stored in New Orleans currently stands at some half a million tons, allowing distributors to move everything from zinc to tungsten at their schedule without the pressure of deadlines from space-restricted ports like Amsterdam.
With New Orleans' propensity for easy storage, zinc has found a ready home and quarantine at a time when there's few buyers to be found. It's been a brutal year for most metals, but only nickel has taken more of a pounding on the metal commodities market than poor alphabetically-challenged zinc. The reason for zinc's slowdown is as ubiquitous as it is predictable -- if economists had parrots for pets, they'd all be able to say "China's economic slowdown" by now -- and the numbers suggest that the worst is far from over. Of the 250,000 tons held in New Orleans, 150,000 placed for order have been canceled outright, including 30,000 in just a single day. Since the cash-to-three-months ratio has been trading steadily smaller and smaller, it makes no sense for a seller to unload zinc today when it'll likely be worth more in a vague future, resulting in massive accumulations without any push to quickly liquidiate supply. While some optimists suggest that the cancellations will drive a downturn of supply based on cheap availability to second-place buyers, zinc bulls have been predicting low supply and global shortfall for the better part of a decade. Other than the commodity boom of 2011, it has yet to happen, and it may not happen for quite some time.
Movers and Keepers
The who's who of the metal world has decided that it's better to keep their zinc in New Orleans than sell it on the market: Glencore, Pacorini Metals, Henry Bath, and ISTIM all keep thousands or even tens of thousands of tons on hand. Despite the shuffling around of assets (Pacorini sold 20% of their holdings to Glencore), there's a hard deadline on the horizon. The Board of Directors for the Louisiana Port will meet at the close of September for a decision to sell 14 acres of warehousing space to Lake Pontchartrain Properties, a move that will leave a number of warehouses high and dry. If the push goes through, the zinc holdings will need to be unloaded and quickly come 2016, resulting in a massive dump of metal onto the market. That's a fantastic opportunity to short-sell zinc and capitalize as companies scurry to find buyers for zinc that so few businesses seem to want anymore.
- The Takeaway: it's a bad time to hold zinc as a long-term investment but a fantastic time to short-sell zinc commodities. Look for deals for delivery between six to twelve months from now with the option to short the futures. There's relatively little risk given the poor performance of zinc through 2015 and the lack of interest in long-term contracts, making it a great choice for low-volatility portfolios.
- Is there any reason to be optimistic about zinc? It's hard to see one at the moment. Portfolios that currently hold zinc shouldn't sell off the commodity when it's trading at three-year lows, but should be prepared to wait a long while before they can see a rebound to anything approaching good growth.