Andy Home: ROI-Supply is hitting galvanized zinc after 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 $3.633.50 metric tons. This is a 13% increase since the beginning of the year.

Price strength is surprising.

The January poll of analysts generated an average mean price forecast of $3 041.50 per tonne for the second quarter. From 25 participants, the most bullish prediction was that zinc would average $3318 per ton.

The demand is slow. More than half of the global zinc consumption is in galvanised steel. The long-running 'bust' in China's property market 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 their twice-yearly meeting in April they 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 Smelter in Kazakhstan has been operating with reduced capacity since May 5, when a deadly blast occurred. Nexa Resources, two weeks later announced that it had suspended its Cajamarquilla Plant in Peru due to a fire.

These two zinc-metal production plants have a combined annual capacity of 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 only partially impacted 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.

Globally, the refined zinc production increased by just 1.7% in a year. All of this?growth is attributed to 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.

Due to the mismatch between processing performance and the market, the?zinc industry is split into two distinct areas: a well-supplied Chinese marketplace and a persistent shortage in the rest the world.

In this context, the reduced output of two of West's biggest smelters can be considered a big deal.

SURPLUS DISAPPEARING

Particularly since Western Zinc Market is running out of inventory.

LME stock, both registered and non-warranted, increased from 50,000 ton in October, up 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, up just 21,125 tons from the beginning of the year. This is low compared to the peak in 2024 of almost 400,000 tonnes.

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

The ILZSG, which met in October of last year to discuss the global supply surplus, forecasted a 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 anticipates that the?mismatch of production growth will continue this year. The Chinese refined metal production is expected to grow by 3.0% in the year 2026, thanks to increased smelter capacities.

Global output will increase by only 1.4%. This means that the West's smelter issues are likely to continue. These forecasts were made prior to 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 'zinc supply chain. This tipping point may come 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 fell by a third, to 300 000 tons in 2025. They also dropped another?57% on an annual basis 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", opening 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 amount of LME stock this year.

China is clearly not short on 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)