LME zinc has rallied to $3,610/t as of late July, up 27.5% year-on-year, driven almost entirely by supply-side tightness rather than demand strength. The rally has been spectacular — multi-year highs above $3,500 were sustained through May-July — but analysts increasingly see a retreat in H2 as demand weakness reasserts itself.
The supply story is all about the concentrate market. Mine closures, delayed expansions, and declining ore grades have squeezed concentrate availability. Teck Resources' Red Dog mine, the world's largest zinc operation, has faced operational headwinds. The result is that smelters are competing for limited feed, keeping refined production constrained and LME stocks low.
But the demand picture is deteriorating. Zinc's primary end-use is galvanizing steel, and global steel demand growth is anemic. The World Steel Association projects just 1.3% growth in 2026. China's steel sector is under particular pressure — property construction remains weak, and steel exports face rising trade barriers. ILZSG sees refined zinc demand rising only 1% to 13.86Mt in 2026, while supply growth is faster.
The LME vs SHFE inventory divergence captures the market's schizophrenia. LME registered stocks are at crisis lows, with cancelled warrants removing available metal. But SHFE inventories are swollen, reflecting weak Chinese demand. This is the mirror image of copper: LME tightness masks broader softness.
ILZSG forecasts a near-balanced zinc market in 2026 — a deficit of just 19,000t — after several years of deficits. Wood Mackenzie sees prices retreating to around $3,350/t by year-end as the concentrate market gradually eases. Analysts surveyed by Reuters in July flipped their 2026 balance from deficit to surplus.
The bull case: LME stocks are genuinely low, the concentrate market is structurally tight, and any demand recovery would expose how little available metal there is. The bear case: demand is the story that matters, steel is weakening globally, and high prices are already incentivizing smelter capacity restarts. The base case: prices moderate toward $3,300-$3,500 in H2 as steel demand softens and concentrate supply gradually responds to high prices, but persistent LME tightness prevents a crash.
This is not the time to lock in long-term zinc coverage at $3,600. The rally is supply-driven, and demand is weakening. Steel’s struggles will eventually pull zinc down. Use short-term floating contracts through Q3 and wait for the retreat toward $3,300-$3,400 before committing to H1 2027 volumes. One caveat: LME stocks are genuinely low. If Chinese stimulus materializes or steel demand surprises, the physical market could snap tight quickly. The right approach is phased coverage — cover 50% of near-term needs on any dip below $3,400, keep 50% floating, and monitor LME warrant data weekly. A sustained drop in cancelled warrants would signal the LME squeeze is ending.