ROI-Polarized zinc becomes a bull-bear battleground: Andy Home
Record long and short positions have locked zinc bulls and bears in a standoff on the London Metal Exchange (LME). The fund community is split down the middle over whether this year's unexpected price rally is over or merely pausing for breath.
Investment managers have accumulated record short positions on the London zinc contract. But fund long positioning is also close to record highs. The tension is manifest in outright price volatility and a rolling squeeze on nearby dates. The conspicuous absence of any price consensus reflects an equally polarized physical market, neatly captured by the International Lead and Zinc Study Group (ILZSG) in its latest statistical snapshot.
EXPECTED FEAST TURNS TO FAMINE When ILZSG met this time last year, it expected robust mine supply and higher refined production to overwhelm demand to the tune of a 271,000-metric-ton surplus.
The group's latest assessment is that the global market will experience an 88,000-ton supply shortfall this year. The revision is all down to what's been happening on the supply side. Demand is barely growing, reflecting zinc's exposure via galvanized steel to the construction sector, which is weak everywhere, particularly in China.
But zinc supply has surprised on the downside. Rather than growing as expected, global mined zinc output is on track to fall by 2.6% year-on-year in 2026, reflecting a combination of the closure of Glencore's Lady Loretta mine in Australia, lower grades at Teck Resources' Red Dog mine in Alaska and unexpected disruption at Boliden's Garpenberg mine in Sweden.
Tight raw-materials markets have pushed smelter treatment charges into uncharted negative territory, leaving many smelters living off sales of by-products such as sulphuric acid. Chinese smelters are winning the intense competition for zinc concentrates. China's refined output is expected to rise by 3.7% this year from 2025, but production in the rest of the world is due to contract by 2.0%.
The result is a polarized physical market, with China in surplus and everyone else short of metal. CHINA'S EXPORT SURGE
Chinese exports are helping rebalance the global market, thanks to a widening arbitrage window with the LME. China shipped 111,000 tons of refined zinc in August and September, according to the World Bureau of Metal Statistics, which collects official customs figures.
Flows have unsurprisingly been directed to LME warehouse locations such as Hong Kong, Singapore and the Taiwanese port of Kaohsiung. China has traditionally been a net importer of refined zinc, and the last time it exported such volumes was 20 years ago, before Beijing imposed export tariffs in 2008.
ROLLING SQUEEZE China's deliveries have helped LME stocks recover from an August low of 92,550 tons to 165,650 tons, but the arrivals are being quickly snapped up.
Last week brought 26,300 tons of net cancellations, and the amount of metal now awaiting physical load-out has grown to almost 20% of the headline stocks total. Off-warrant inventory, meanwhile, remains extremely low at just 11,261 tons. The rolling squeeze that has gripped the LME contract since July is becoming more acute again.
The cash premium over three-month metal
For how long remains to be seen. RELIEF NEXT YEAR?
Zinc bears can take heart from ILZSG's forecasts for next year. The group expects mined supply to grow by 3.0% year-on-year in 2027, flipping the global market back to a modest 25,000-ton supply surplus.
That, however, is a very marginal call in what is a 14-million-ton global marketplace. It also comes with the caveat that ILZSG was expecting mine production to grow this year, which is not how things have turned out.
Short-term dynamics will be determined by whether China can maintain this pace of exports. Even China's super-competitive smelters seem to be struggling to access raw material. The country's imports of zinc concentrates grew by 30% year-on-year in 2025 but inbound volumes were up by just 0.6% year-on-year in the first nine months of 2026.
Right now, there is still everything to fight for and the bull-bear battle looks set to continue for a while yet. (The opinions expressed here are those of Andy Home, a columnist for Reuters.)
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(Writing by Andy Home; Editing by Marguerita Choy)
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