The Deficit That Wasn't Supposed to Happen
For most of 2025, the consensus view was straightforward: zinc was heading into a deepening surplus. The International Lead and Zinc Study Group (ILZSG) had penciled in an 85,000-tonne surplus for 2025 and a 271,000-tonne glut for 2026. Mine supply was rebounding after three years of contraction, Chinese smelters were ramping, and demand growth was tepid. The bears had the charts, the spreadsheets, and the momentum.
They were wrong. Spectacularly wrong.
In April 2026, ILZSG issued a stark revision: the 2025 market actually recorded a small deficit, and 2026 is now forecast at a ~19,000-tonne deficit — a stunning 290,000-tonne swing from the prior surplus forecast. LME three-month zinc has rallied to near four-year highs, touching the $3,500-4,000 per tonne range in June 2026. On-warrant LME stocks have fallen below 100,000 tonnes for the first time since 2022. European physical premiums are trading at $300-400 per tonne over LME.
This is not a cyclical inventory correction. It is a structural dislocation driven by the attrition of Western smelting capacity, a collapse in treatment charges that has shattered smelter economics, and a deepening geographic bifurcation between Chinese surplus and Western deficit.
The Kazzinc & Cajamarquilla Shock
On May 5, 2026, a fatal explosion rocked Glencore's Kazzinc smelter in Kazakhstan, forcing operations to run at sharply reduced capacity. Two weeks later, Nexa Resources suspended its Cajamarquilla plant in Peru following a major fire. Together, these two facilities represent approximately 600,000 tonnes per year of zinc metal capacity — roughly 150,000 t/y at Kazzinc and 100,000 t/y effectively lost at Cajamarquilla alone, with broader operational disruptions affecting the balance.
These are not isolated incidents. They are the most dramatic examples of a broader pattern: Western smelter attrition that has been building for years. Nyrstar, Glencore, and Boliden have all curtailed output across European operations since the 2022 energy crisis. Toho Zinc's Annaka plant in Japan closed permanently. Korea Zinc's Seokpo smelter endured a temporary suspension.
Mine Supply Is Recovering — Smelter Supply Isn't
The conventional zinc narrative has long centered on mine supply constraints. But in 2025, global mined zinc production surged by 4.8% year-on-year. ILZSG forecasts mine output growth of 4.3-4.6% across 2025 and 2026. New projects are coming online: Ozernoye in Russia, the Tara mine restart in Ireland, and South32's Hermosa project in the US.
The bottleneck is not in the ground. It is in the smelters. Global refined zinc production grew by only 1.7% in 2025, and virtually all of that growth was concentrated in China, where smelters boosted output by 6.7%. Outside China, refined production actually fell by 2.2%. This is the central structural tension of the 2026 zinc market: plenty of ore, not enough processing capacity in the regions that need it most.
| Year | Oct 2025 Forecast | Apr 2026 Revised | Change |
|---|---|---|---|
| 2024 (actual) | Deficit 69kt | Deficit 69kt | — |
| 2025 (actual) | Surplus 85kt | Deficit ~33kt | -118kt |
| 2026 (forecast) | Surplus 271kt | Deficit ~19kt | -290kt |
The Collapse of TC/RCs: When Smelters Lose Money
The treatment charge (TC/RC) is the fee smelters charge miners to process concentrate into refined metal. In early 2025, Korea Zinc and Teck Resources set the annual benchmark at $80 per tonne — down from $165/t in 2024 and the lowest in at least 50 years. By late 2025 and into 2026, spot TC/RCs had fallen even further, to approximately $0-10 per tonne for some Western smelter deals.
China's imports of zinc concentrates jumped by an estimated 25% year-on-year in 2025 as domestic mine output declined and new smelter capacity came online. Chinese smelters have been aggressively bidding for foreign concentrates, driving up ore prices globally and compressing TC/RCs for everyone else. The result is a margin squeeze that has forced Western smelters to curtail output exactly when the market needs them most.
Demand: Galvanized Steel and the Two-Speed Economy
Zinc's demand story is anchored in galvanized steel, which accounts for approximately 60% of global refined zinc consumption. China's property sector continues to struggle, capping SHFE zinc prices. India is the bright spot, with zinc consumption growing at 5-7% annually driven by the National Infrastructure Pipeline and auto production growth. Beyond construction, zinc demand benefits from electricity grid investment, data center construction, and automotive production. ILZSG projects global refined demand of 14.0 million tonnes in 2026, growing 1.3% year-on-year.
Will Chinese Supply Fill the Gap?
China is the world's largest zinc producer and consumer. Its smelters have been running hard — output rose 6.7% in 2025 and is forecast to increase by a further 3.0% in 2026. However, four constraints limit China's ability to fill the Western supply gap:
- Thin margins on exports: With LME/SHFE arbitrage windows narrow, Chinese smelters have limited incentive to export.
- Logistical bottlenecks: Moving refined zinc to LME warehouses in Europe or the US takes weeks with significant freight costs.
- TC/RC constraints: Chinese smelters face their own pressure on TC/RCs, with raw material inventories as low as 20 days' cover.
- Quality and registration: Not all Chinese zinc is LME-registered or meets Western industrial specifications.
Inventory: The Canary in the Coal Mine
LME on-warrant zinc inventories collapsed from ~230,000 tonnes at the start of 2025 to under 50,000 tonnes by October 2025, triggering one of the fiercest short squeezes in LME history. By June 2026, on-warrant stocks had fallen below 100,000 tonnes — the lowest since 2022. The drawdown is concentrated in Asian warehouses, suggesting metal is being shifted to fill Western supply chain gaps. When LME on-warrant stocks fall below 100kt, the market becomes vulnerable to financing deals, backwardation spikes, and sudden squeezes.
Buyer's Guide: Hedging Zinc in a Deficit Market
For industrial consumers, the current environment demands a sophisticated approach: extend hedge tenors to 12-18 months, use LME swaps and options to protect against extreme upside while retaining flexibility, monitor TC/RCs as a leading indicator (recovery above $100/t would signal loosening), secure physical premiums early via term contracts, and diversify supply sources across LME-registered brands.
Outlook: H2 2026 and Beyond
The Fastmarkets base case sees the average LME zinc price for 2025 at $3,218/t, with a slight increase expected in H1 2026. From mid-2026, rising global mine supply and Chinese smelter expansions could push the market back toward surplus. However, the structural dilemma remains: rebalancing the concentrate market requires smelter cuts, which deepen the refined deficit.
Our view is that the risks remain skewed to the upside for at least the remainder of 2026. The Kazzinc and Cajamarquilla outages are not priced in as transient events, and the market has not fully priced the possibility that they persist longer than expected. ILZSG's 19kt deficit is extremely small relative to a 14Mt market — a single smelter outage could swing the balance substantially. The Western smelter deficit is not a transitory phenomenon; it is the new normal.