Zinc continues to glow red hot amid the general gloom pervading the industrial metals sector.
On the London Metal Exchange (LME) three-month metal closed last week valued at $2,364 per tonne, up 50 percent on the start of the year and the highest it's been since May last year.
Everyone, it seems, is still buying into the galvanising metal's enticing narrative of supply shortfall, something of a stand-out in a sector that is more worried about the weak state of demand.
So too is Nyrstar, the Belgian zinc smelting giant. "We believe that the zinc price should continue to rise on the basis of improving supply and demand fundamentals", said the company's chief executive officer, Bill Scotting.
Except that statement accompanied a notification that the company has just initiated a hedging programme, essentially locking in forward prices through the end of the first quarter of next year.
Which raises the question as to whether Nyrstar thinks this year's rally might be about to run out of steam.
Should zinc bulls be worried?
THE NYRSTAR HEDGES
Nyrstar has used the options market to mitigate the potential for lower prices over the coming months.
The "collar structures", as they're called, involve the purchase of put options, which confer the right to sell, and the simultaneous sale of call options, which confer the right to buy.
The net effect, as Nyrstar explained, is to eliminate price exposure outside of a $2,137-2,437 per tonne price band through the end of this year.
A similarly structured hedge over the first quarter of next year will do the same in a $2,100-2,457 price band, with exposure kicking back in at a price above $2,800 per tonne.
There are several points worth noting here.
Firstly, Nyrstar has done this sort of thing before. Similar short-term "strategic" hedges on the zinc price were put in place in both 2013 and 2014, while the company has this year also hedged its foreign exchange exposure.
Secondly, the latest hedges cover only a small part of the company's production, around 8,000 tonnes per month of metal. Production guidance this year is 1.0-1.1 million tonnes, equivalent to 83,000-92,000 tonnes per month.
Thirdly, Nyrstar is going through a wholesale financial restructuring, including the disposal of its zinc mining business, as it tries to shore up its balance sheet in the wake of zinc's plunge to a multi-year low of $1,444.50 per tonne in January this year.
Given Nyrstar's trials and tribulations, locking in a degree of pricing certainty on part of its output is understandable.
But it also means that Nyrstar's zinc hedges may say as much about the company as they do about the zinc price.
The more interesting question, though, is whether other producers are thinking, and doing, the same.
Because the other unique thing about Nyrstar's hedges is that the company publicly discloses them in explicit detail.
Plenty of other producers don't.
But there are signs that others may also be capitalising on zinc's super-strong rally to, quite literally, hedge their bets.
Take the LME options market, for example.
Back in June all the excitement was about what was happening on the upside, with super-bullish plays being put on strike prices as high as $3,000 per tonne in June 2017.
Those call options are still open, by the way, but in the interim the overall tenor of the LME options market has changed.
Back in June open interest on calls through January 2018 totalled 42,582 lots, while open interest on puts stood at just 26,200 lots.
Fast forward a couple of months, however, and the playing field has shifted in favour of put options.
There are now 48,679 lots of open interest on put options through January 2018, exceeding the 44,914 lots of open interest on the calls.
The last few days in particular have seen some fairly heavy volumes go through on puts at the $2,000, $2,100 and $2,175 strike prices across the front three months.
The scale of the shift in positioning goes way beyond anything that could be attributable just to Nyrstar's hedging.
The increase in put option open interest since June represents almost 562,000 tonnes.
Evidently, others are thinking the same about the sustainability of the zinc rally as Nyrstar, even if they don't have the Belgian company's specific balance sheet pressures.
Moreover, options are only one way of hedging forward price exposure.
The more conventional path is in the form of forward sales and here too, the shape of the forward zinc curve on the London market should give pause for thought.
Beyond January next year the curve is firmly backwardated, which seems to bear out chatter on the LME "Street" about what one broker, Kingdom Futures, has called "aggressive forward producer hedging programs".http://www.reuters.com/article/nyrstar-zinc-ahome-idUSL8N1BH29M