Zinc and Hurricane Katrina: When a Storm Moved the Metal Market

Most of the stories in this book are about people. Traders who got greedy. Governments that miscalculated. Speculators who cornered a market and then lost control. Chapter 21 of Torsten Dennin’s “From Tulips to Bitcoins” is different. The main character is a hurricane. And the commodity it moved is one that most people have never thought about: zinc.

The Ugly Sister

Zinc is the third-largest metal market in the world, behind copper and aluminum. It trades on the London Metal Exchange in US dollars per metric ton. If you have ever held a galvanized steel fence post or a corrugated roof panel, you have touched zinc. It protects steel from rusting. That is its main job. Not glamorous, but essential.

In the early 2000s, zinc and its neighbor lead were called the “ugly sisters” of the metals world. Low prices, thin margins, stagnating supply. Nobody was excited about zinc. Copper had its China story. Aluminum had aerospace. Zinc had rust protection.

But China was quietly changing the math. As the country built cities and highways at a pace nobody had seen before, demand for construction metals kept climbing. By 2004, China flipped from being a net zinc exporter to a net importer. That shift was significant. The world’s factory was now buying zinc instead of selling it.

Prices started moving. From a range of $750 to $850 per ton, zinc crept up to about $1,200 by mid-2005. A nice run, but nothing dramatic. The market was tightening slowly. Global zinc inventories stood at roughly one million metric tons, enough for about 35 days of supply. Not a lot of cushion.

250,000 Tons Under Water

Here is a fact that sounds made up but is not. The London Metal Exchange operated 24 official warehouses in New Orleans. Those warehouses held 250,000 metric tons of zinc. That was about 25% of all known global zinc inventories, and close to 50% of all zinc that was directly tradeable on the LME. In the same warehouses sat 1,200 tons of aluminum and 900 tons of copper.

New Orleans sits almost entirely below sea level. The city depends on a system of levees and pumps to keep the water out. Everyone knew this. The LME knew this. The warehouse operators knew this. And yet, a quarter of the world’s tradeable zinc supply sat in a city that was, by design, a bowl waiting to be filled with water.

On August 29, 2005, Hurricane Katrina made landfall. Category 5. The levees broke. The city flooded.

The zinc did not go anywhere. It was still in the warehouses. But you cannot get to a warehouse when the streets are under water. You cannot load trucks. You cannot move metal to a port. 250,000 tons of zinc became physically inaccessible overnight.

The Price Spike

The market reacted fast. By September 2, zinc had risen to a five-month high. On September 6, the LME officially suspended zinc deliveries from New Orleans. That suspension turned a supply concern into a supply crisis. If you had a futures contract and needed physical zinc delivered, New Orleans was off the table.

The price jumped to $1,454 per ton, the highest level since 1997. The CEO of the LME told the market that the suspension could last until 2006. Nobody knew when the city would be drained, when the warehouses would be accessible, when trucks could roll again.

By the end of 2005, zinc had broken through $1,900. Two weeks later it hit $2,400. In the first half of 2006, it crossed $4,000. And in November 2006, zinc peaked at $4,600 per ton. Nearly four times the price before Katrina hit.

A metal that nobody was paying attention to had become one of the hottest trades on the exchange. Not because of a speculator. Not because of a government policy. Because a hurricane flooded a city where someone had decided to store a quarter of the world’s supply.

The Inevitable Reversal

What goes up on a supply shock eventually comes back down when supply returns. By August 2007, zinc was back to $1,500. The warehouses were accessible again. New supply came online. The panic premium evaporated.

The entire cycle, from $1,200 to $4,600 and back to $1,500, played out in about two years.

What Stays With Me

Dennin’s telling of this chapter is a lesson in concentration risk. The zinc market had a structural vulnerability that everybody could see on a map. A city below sea level. A hurricane zone. And yet 25% of global inventories sat right there, in warehouses that would flood when the inevitable happened.

Nobody planned to corner the zinc market. Nobody was running a scheme. The price nearly quadrupled because of geography and bad logistics planning. A storm did what storms do.

The other lesson is about timing. China was already tightening the zinc market before Katrina. Inventories were down to 35 days of supply. The hurricane did not create the shortage from nothing. It hit a market that was already stretched thin and broke it. If zinc had comfortable inventory levels and weak demand, the storm would have caused a temporary inconvenience. Instead, it triggered a two-year price explosion.

Sometimes the biggest moves in commodity markets are not caused by the smartest trader or the boldest bet. Sometimes a hurricane just hits the wrong city.

Previous: Chapter 20: Copper Liu Qibing

Next: Chapter 22: Amaranth Natural Gas

This is part of my From Tulips to Bitcoins book retelling series.