Zinc prices on the London Metal Exchange (LME) have climbed to their highest point in over four years, reaching $3,823.85 per metric ton on Friday and $3,858 per metric ton on Tuesday. This rally, representing a 22% increase year-to-date, is primarily attributed to fears of physical metal shortages outside of China, despite the International Lead and Zinc Study Group (ILZSG) estimating a global supply surplus of around 145,000 tons in the first five months of the year. The disparity between regions is evident in LME warehouse inventories, which have dropped 25% in the last two months to 93,125 tons, while Shanghai Futures Exchange inventories have more than doubled to 155,954 tons.
The supply tightness is further highlighted by a significant backwardation in the LME market, where immediate delivery zinc commands a premium over future contracts. The cash premium over the three-month contract surged to $132 per ton on Friday, up from zero in early July, reflecting the urgency for physical metal. This situation is reminiscent of last October when the premium hit a record $323 per ton. Speculative buying has amplified these price gains, as analysts like Alastair Munro of Marex note that repeated bearish bets expecting increased mine output have been unwound, forcing speculators to buy back positions.
A critical factor contributing to the supply concerns is the severe shortage of zinc concentrate, the partially processed ore, which has driven treatment charges to record negative levels, as low as minus $117.50 per ton. This indicates that smelters are now paying miners to secure concentrate, a reversal from the usual practice. While China's refined metal production has seen significant growth, global mine production growth has slowed considerably to 1.1% from January to May, after a 4.8% jump last year. Glencore, for instance, reported a 21% year-on-year decline in its first-half own-sourced zinc production. Chinese exports, particularly to LME warehouses in Hong Kong, have begun to emerge as a potential relief for the tight London market, with about 17,000 tons delivered so far this week, stabilizing on-warrant inventory around 95,000 tons.
