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Port of New Orleans Warehouses

By August 2005 London Metal Exchange (LME) facilities in New Orleans held some 250,000 tons of zinc, as well as around 1,200 ton of aluminium and 900 tons of copper. The 24 LME-listed warehouses in New Orleans were estimated to hold almost half of all the stocks of zinc traded on the LME. Pallets of zinc ingots had built up in the city due to attractive warehouse deals and the proximity of New Orleans to the Mississippi River.

Global commercial stocks, including LME inventories, were a little over a million metric tons, according to data from the International Lead and Zinc Study Group. That was equivalent to 35 days of world use at current levels of consumption.

By 02 September 2005 speculators pushed the price of zinc to the highest for five months, anticipating that Hurricane Katrina would cause supply snags. After considering all of the relevant factors and consulting with LCH.Clearnet Limited, the Exchange decided 06 September 2005 temporarily to suspend as good delivery against LME contracts all LME warrants for metal stored in New Orleans. Zinc prices hit an eight-year high after the London Metal Exchange suspended deliveries from New Orleans.

The Exchange kept under review the potential effect on the LME markets of flooding in New Orleans. The Exchange had noted that the shortage of reliable information about conditions in New Orleans led to unacceptable levels of uncertainty about the extent to which metal on LME warrant in New Orleans may be subject to damage from flooding. In order to safeguard the orderliness of trading, the Exchange decided temporarily to suspend New Orleans warrants until the situation can be clarified.

On 08 September 2005 Zinc dropped $US3 to $US1,371, amid receding concerns about stocks in New Orleans, as there was availability elsewhere. But LME chief executive officer (CEO) Simon Heale said it will maintain its suspension of New Orleans warehouses for delivery of warranted metal until its employees can inspect for damage caused by Hurricane Katrina.

The market was assuming that the metal was damaged and would be inaccessible for a lengthy period of time. The former appears unlikely, while the later appears quite probable. A review of post-Katrina satellite imagery suggested that none of the 24 warehouses suffered visible structural damange, and all but three or four stood on high ground that would not have flooded. The entire city of New Orleans is under a mandatory evacuation order, pending de-watering [estimated to be completed in October 2005] and corpse collection [which might require several additional months]. The Port of New Orleans may not re-open until some time in 2006.

Background - London Metal Exchange

The London Metal Exchange is the world's premier non-ferrous metals market with highly liquid contracts and a worldwide reputation. It is innovative while maintaining its traditional strengths and remains close to its core users by ensuring its contracts continue to meet the high expectations of industry. As a result, it is highly successful with a turnover in excess of US$3,000 billion per annum. It also contributes to the UK's invisible earnings to the sum of more than 250 million in overseas earnings each year.

Throughout its history, the LME has been an industry-based market and the founding of its metals contracts on tangible deliveries cements that link - every LME contract is presumed to be capable of physical delivery. As a result of this physical aspect, large stocks of material are held in warehouses approved, but not owned, by the LME at selected locations around the world. Currently there are over 400 warehouses in some 32 locations covering the USA, Europe, the Middle and the Far East.

Delivery against LME contracts is in the form of LME warrants, which are bearer documents of title enabling the holder to take possession of a specified parcel of metal at a specified LME approved warehouse. Each LME warrant is for one lot of metal, the tonnage of which is dependent on the contract specification. The front of the LME warrant displays information about the parcel of metal, including its brand, the exact tonnage, the shape and the location.

Warrants are issued by the warehouse companies at the request of the owner of the metal once it is properly stored in an LME-approved warehouse and the warehouse company has ensured conformity with the LME's Special Contract Rules for that metal. These rules include, but are not limited to, the technical specification of the metal, its shape, weight and bundling. The metal must also be of a brand that is approved and listed by the LME.

Background - Zinc

Zinc is the 23rd most abundant element in the earth's crust. Sphalerite, zinc sulfide, is and has been the principal ore mineral in the world. In the United States, about two-thirds of zinc is produced from ores (primary zinc) and the remaining one-third from scrap and residues (secondary zinc). Zinc is commonly mined as a co-product with standard lead and both metals have growing core markets for their consumption.

Zinc is necessary to modern living, and, in tonnage produced, stands fourth among all metals in world production - being exceeded only by iron, aluminum, and copper. Zinc uses range from metal products to rubber and medicines. About three-fourths of zinc used is consumed as metal, mainly as a coating to protect iron and steel from corrosion (galvanized metal), as alloying metal to make bronze and brass, as zinc-based die casting alloy, and as rolled zinc. Zinc's electropositive nature enables metals to be readily galvanised, which gives added protection against corrosion to building structures, vehicles, machinery and household equipment. The remaining one-fourth is consumed as zinc compounds mainly by the rubber, chemical, paint, and agricultural industries.

In 2003, domestic zinc mine production, expressed in zinc content of ore, decreased by about 2% compared with that of 2002, according to the U.S. Geological Survey (USGS). Based on recoverable content of concentrate and annual average US price, the value of zinc mine production was estimated to be about $661 million, slightly less than that of 2002.

By the end of 2003, only 10 mines in 5 states were operating in the United States. Because of mine closures in the previous 2 years, Alaska fortified its position as the leading producer of zinc concentrate, followed by Missouri, Tennessee, and Montana. In 2003, as in every year since the opening of Alaska's Red Dog Mine in 1989, US mine production greatly exceeded smelter capacity, necessitating exports of concentrate and imports of refined zinc metal. Most of the zinc concentrate, supplied entirely by the Red Dog Mine, was exported to Canada, followed by the Republic of Korea, Japan, and Belgium.

Zinc metal production in the United States, which was provided by 2 primary smelters and 13 large- and medium-sized secondary smelters, increased by about 3% in 2003. More than one-half of zinc metal imports was from Canada, followed by Mexico and Peru.

Apparent US domestic consumption of refined zinc metal in 2003 decreased to about 1.1 million metric tons (Mt). About one-half of metal consumed in the United States was used for galvanizing, followed by use in zinc-base alloys and brass and bronze. Zinc compounds and dust were used primarily by the agriculture, chemical, paint, and rubber industries.

According to International Lead and Zinc Study Group, world demand for refined zinc metal was expected to rise by 3.5% to 10.1 Mt in 2004. Mine output was expected to be 0.8% higher than in 2003 and to accelerate in 2005-06. More than one-half of the 750,000 t/yr of Western mine capacity, which was taken out of the market owing to low zinc prices, was on care and maintenance at yearend 2003. It was estimated that about 80% of these idle mines would be back in production by the end of 2005. There was another 436,000 t/yr of output associated with Western projects which was deemed probable. Production of refined zinc was expected to increase by 1.7% to about 10 Mt in 2004, slightly below consumption. This imbalance could result in zinc price increases.

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