Three-month zinc on the London Metal Exchange reached a fresh four-year high of $3,858 per metric ton on Tuesday morning, driven by persistent supply tightness and short-covering dynamics in the market, according to Reuters reporting covered by IndexBox. The rally has been accompanied by a significant tightening in LME time-spreads, with the premium for cash metal over three-month delivery widening to $131 per ton. This situation reflects similar market conditions observed in October of the previous year, when the premium reached a record high of $323 per ton.
The current tightness is underpinned by historically low LME inventory levels, which have also triggered the squeeze dynamics. China has begun redirecting zinc exports toward LME warehouses in Hong Kong, potentially offering relief to short-position holders. However, global demand growth remains subdued.
The International Lead and Zinc Study Group estimates that global zinc usage grew by only 1.5 percent year-on-year from January to May. In contrast, refined metal output expanded faster at 3.5 percent, resulting in a global supply surplus of approximately 145,000 tons during the first five months of the year. The production surplus is concentrated primarily in China, where most output growth has occurred.
Western smelters have experienced supply disruptions and margin compression due to collapsing treatment charges. Shanghai Futures Exchange stocks have more than doubled to 155,954 tons since the beginning of January. LME stocks, including off-warrant storage, currently stand at 124,677 tons, representing a net decrease of 6,500 tons despite recent daily deliveries.
Since the start of the previous week, daily warranting actions have been recorded as the rising LME cash delivery premium attracts metal into the system. Volumes have totaled approximately 17,000 tons, stabilizing on-warrant inventory around 95,000 tons. Off-warrant stocks have increased from a July low of 15,480 tons to 29,627 tons.
Hong Kong accounts for roughly two-thirds of the deliveries onto LME warrant and holds an additional 5,000 tons in off-warrant storage. China's role in the market has shifted considerably. Historically a major importer of refined zinc, the country has achieved near self-sufficiency through expanded domestic smelter capacity.
Imports declined by one-third to 299,000 tons in the previous year, and China turned net exporter in both November and December, with metal delivered to LME warehouses in Singapore and Taiwan to capitalize on the cash squeeze. The country returned to net exporter status in July, with outbound volumes of 9,200 tons, according to Shanghai Metal Market. The pace of Chinese arrivals in the current cycle is slower than previously observed.
Market participants anticipate that even Chinese smelters may reduce operating rates as treatment charges compress margins further. Investment funds have accumulated over 110,000 tons of long positions, representing the largest collective bet on higher prices since the LME began publishing positioning reports in 2018. In the options market, significant open interest exists on December calls, with nearly 1,500 lots at a strike price of $4,000 per ton and another 757 lots at $4,500 per ton.
The bullish market narrative centers on restricted mine supply. After three consecutive years of decline, global mine production increased by 4.8 percent in the previous year. However, growth has decelerated substantially to 1.1 percent from January to May of 2026, according to the International Lead and Zinc Study Group.
Competition for mined concentrates remains fierce, with spot treatment charges for Chinese imports at a record low of minus $117.50 per ton. Despite margin pressures, Chinese smelters continue operating, with growth characterized as significant during the first five months of 2026. The trajectory of Chinese smelter output will be critical for both market bulls and short-position holders seeking relief from the current squeeze.
Source: IndexBox via Reuters
Source: indexbox.io