Zinc at $3,610 as Exchange Inventory Divergence Deepens — LME Tight, SHFE Swollen

The zinc market is telling two completely different stories depending on which side of the Pacific you sit on. In London, LME zinc cash prices at $3,613-3,614 per tonne on July 24 are approaching four-year highs, LME inventories are shrinking week by week, and the cash-to-three-month spread sits in an $18.50 backwardation that screams physical shortage. In Shanghai, SHFE warehouse stocks are at their highest July level since 2017, Chinese demand is sluggish, and smelters are running at reduced rates because they cannot make money processing concentrate at negative treatment charges. The market has not seen a divergence this stark in a decade.

The LME side of the story is unambiguous. Zinc stocks fell by 3,075 tonnes week-on-week to 111,725 tonnes in the week ending July 17, according to LME Insight data. Cancelled warrants stood at 26,350 tonnes. The persistent backwardation — where spot metal commands a premium over three-month delivery — indicates that whoever needs zinc right now outside China is paying up to get it. This is not a paper-trading phenomenon. It reflects genuine tightness in the Western physical market, where European smelter restarts have been slow and import flows from Asia have not fully compensated.

The SHFE side could not look more different. Zinc warehouse stocks in China climbed to 154,727 tonnes by early July, the highest seasonal level since 2017, according to Kedia Advisory data reported by Investing.com. The buildup reflects weak domestic demand, particularly from the galvanized steel sector which accounts for roughly 60% of zinc consumption. Chinese construction activity — the primary driver of galvanized steel demand — remains depressed, with the property sector still contracting and infrastructure spending providing only partial offset.

The root of this divergence lies in the zinc concentrate market, which has been in structural deficit for over two years. Spot treatment charges (TCs) — the fees smelters earn for converting concentrate into refined metal — have collapsed to near zero and in some cases turned negative. This means smelters are paying miners for the privilege of processing their ore, a situation that is not sustainable. Chinese smelters, which rely more heavily on imported concentrate than their European counterparts, have been cutting production. SMM data shows Chinese refined zinc output fell in H1 2026 as smelters curtailed runs rather than process at a loss.

The policy dimension adds complexity. China's export tax rebate policy on refined zinc has effectively kept Chinese metal inside China, preventing the surplus from flowing to the deficit LME market. If Beijing were to adjust this policy — and there have been rumblings from industry groups — the arbitrage between SHFE and LME would close rapidly, probably through LME prices falling rather than SHFE rising. This is a binary risk that zinc buyers outside China must track.

Analyst perspectives reflect the split. JP Morgan expects zinc prices to remain supported through Q3 by tight LME inventories and concentrate scarcity, with an average Q3 forecast around $3,400-3,500/t. ING is more cautious, arguing that Chinese demand weakness will eventually pull LME prices lower once the concentrate bottleneck eases — but that easing is not expected before Q4 2026 at the earliest. The International Lead and Zinc Study Group (ILZSG) forecasts a global refined zinc deficit of approximately 150,000 tonnes in 2026, down from 250,000 tonnes in 2025, as mine supply gradually responds to high prices.

The supply response is happening but slowly. New mine capacity in Australia (New Century Resources), Peru (Nexa Resources), and South Africa (Vedanta's Gamsberg expansion) has been ramping up, but the timeline from mine commissioning to refined metal delivery is 12-18 months. The concentrate market will remain tight through at least Q1 2027. On the smelting side, European restarts at Nyrstar's Budel and Glencore's Nordenham have been gradual and partial, constrained by energy costs that, while lower than 2022 peaks, remain elevated by historical standards.

For the coming weeks, the zinc market will be driven by three factors: LME warrant movements (any large cancellation would trigger a squeeze on already-thin inventory), Chinese stimulus announcements from the July Politburo meeting (infrastructure-heavy stimulus would be zinc-bullish), and any signal from Beijing on export policy changes. The balance of near-term risk is for continued LME strength with $3,700/t as the next upside target if inventories fall below 100,000 tonnes.