Andy Home: ROI-Supply is hitting galvanize Zinc as expected surplus does not show up

What is the deal with zinc?

Last week, the London Metal Exchange's (LME) 3-month zinc reached a four-year high of $3633.50 per ton. This is a 13% increase since the beginning of the year.

The price strength is quite surprising.

The January survey of analysts produced a median average price forecast for the second quarter of $3,041.50. From 25 participants, the most bullish prediction was that zinc would average $3318 per tonne.

The demand is?sluggish. More than half of the global zinc consumption is in?galvanised?steel. The long-running Chinese property bubble is a major obstacle.

This year, the zinc market is expected to have a comfortable surplus.

Recent price movements suggest otherwise.

The International Lead and Zinc Study Group also agrees, and at its bi-annual meeting in April it made some significant revisions to their forecasts.

SMELTER HITS

A double supply hit was the trigger for what has now become an annual price rally.

Glencore's Kazzinc plant in Kazakhstan, which suffered a deadly blast on 5 May, is now working at reduced capacity. Nexa Resources, two weeks later announced that it had suspended its Cajamarquilla facility in Peru due to a fire.

These two zinc processing plants have a combined annual production capacity of around 600,000 tonnes.

Zinc's surprising performance is a result of the price sensitivity to news.

WESTERN BOTTLENECK

The long-awaited recovery of mine?supply is now here, but it has not yet fully flowed into the refined zinc market.

According to ILZSG, global mined zinc production will increase by 4.8% annually in 2025 following three consecutive years of decline.

Global refined zinc production increased by just 1.7% in the last year. All of this growth came from China where smelters increased output by 6.7%.

Western metal production declined due to a combination closures, operational issues and voluntary reductions despite low treatment fees, which are a key revenue generator for smelters.

A mismatch between processing performance and zinc prices has left the landscape of the zinc market split, with a Chinese market that is well supplied but a persistent shortage in the rest the world.

In this context, the reduced output of two of West's biggest smelters represents a "pretty significant deal".

DISAPPEARING SUPPLEMENT

Particularly since the Western Zinc market is running out of inventory.

LME stock, both registered and non-warranted, increased from fewer than 50,000 tonnes in October, to 144,000 tons at the end 2025. Since then, however, the rebound is losing momentum.

The combined LME inventories are at 156,000 tonnes, only 21,125 tons higher than the beginning of the year. This is still low compared to the peak in 2024 of almost 400,000 tons.

The Western smelter shortage has kept LME inventories in check and prevented the transition from a global surplus to a LME supply.

When the ILZSG met last October, they predicted a global surplus of 85,000 tonnes in 2025. This year's surplus was even larger at 271,000 tons.

According to the group's most recent assessment, there was a slight deficit in the world last year. It predicts another shortfall of 19,000 tons this year.

CHINESE SELF SUFICIENCY

ILZSG?expects that the mismatch between production growth will continue this year. The Chinese refined metal production is expected to grow by 3.0% in 2020, thanks to the addition of new smelter capacities.

Global output is expected to grow at a modest 1,4%. This means that the West's smelter issues are likely to continue. These forecasts were made before the accidents that occurred in Kazakhstan and Peru this month.

Analysts at Citi believe that the divergent trends of metal production growth could lead China to reach a point of self-sufficiency in the refined metal phase?of the supply chain for zinc as soon as this year.

China has traditionally imported metals to fill in the gap between its domestic production and the demand, but now the country is less interested in importing.

Inbound volumes will shrink by a third, to 300,000. Tons in 2025. And they'll drop another 57% in January-March.

In fact, China briefly became a net exporter of metals in the fourth quarter last year, as the London markets were gripped by a fierce squeeze. This opened up an arbitrage opportunity.

The country has returned to being a modest net importer, with outbound shipments at only 10,600 tons in the first quarter.

If the price is right, it's possible that we will see more export surges.

The Shanghai Futures Exchange has nearly doubled the number of?tons that are registered on LME this year.

China has a lot of metal. The Western market is more?balanced.

It's not necessary to believe me. The current price increase is saying the exact same thing.

Andy Home is a columnist at. This column is great! Open Interest (ROI) is your new essential source of global financial commentary. Follow ROI on LinkedIn and X. Listen to the Morning Bid podcast daily on Apple, Spotify or the app. Subscribe to the Morning Bid podcast and hear journalists discussing the latest news in finance and markets seven days a weeks.

(source: Reuters)