The zinc market is approaching a fork in the road. First-half 2026 has been defined by supply constraints — cancelled warrants, smelter disruptions in Peru and Kazakhstan, and collapsing treatment charges — that have kept LME prices pinned in the $3,400–3,500/t range. But the second half of the year is shaping up to be a very different story. Fastmarkets expects H1 firmness to gradually give way to softening, while Morgan Stanley's full-year 2026 average forecast of $2,900/t implies a substantial correction from current levels. (FACT: Fastmarkets, Morgan Stanley, 2026)
The central puzzle is the "trapped surplus" in China. Chinese zinc smelters have been producing at elevated rates, building a substantial inventory of refined metal. Under normal market conditions, this surplus would flow onto the seaborne market, capping global prices. But with the LME-Shanghai Futures Exchange (SHFE) arbitrage window effectively closed — Chinese domestic prices are below international parity — there is no commercial incentive for Chinese producers to export. The surplus is contained within China's borders, while Western markets remain structurally tight. (FACT: Fastmarkets, 2026)
The arbitrage dynamic could change quickly. If LME prices remain elevated while SHFE prices drift lower (or if the yuan weakens), the export window could open, releasing Chinese metal onto the global market. That release would be the single biggest downside risk for zinc prices in H2 2026. The timing is uncertain, but the direction is clear: the longer the price disparity persists, the more inventory accumulates in China, and the more powerful the eventual export wave will be. (FACT: FocusEconomics, 2026)
On the demand side, the outlook is unambiguously soft. Global construction activity — the single largest end-use sector for zinc (galvanized steel in building structures, roofing, and infrastructure) — is contracting in China and barely growing in Europe and North America. Manufacturing PMIs across the developed world have been trending below the 50-point expansion threshold. This is not a demand environment that can sustain prices above $3,400/t without exceptional supply-side support. (FACT: Reuters, S&P Global, 2026)
The H2 outlook therefore hinges on timing. If Chinese export arbitrage opens before new mine supply fully ramps and before smelter disruptions in Peru resolve, the market could see a rapid price adjustment. If, however, supply constraints persist into Q3 and Q4 — particularly if Peruvian energy rationing continues — the bull case for zinc could extend into year-end. The asymmetry of risk is tilted to the downside, but the path is anything but linear. (FACT: Fastmarkets, May 2026)
The H2 outlook creates a classic tactical dilemma for zinc buyers. On one hand, current spot prices above $3,400/t are unsustainable relative to Morgan Stanley's $2,900/t average forecast — suggesting buyers should delay spot purchases and run lean inventories. On the other hand, the trapped-Chinese-surplus narrative could resolve suddenly, causing a sharp price spike if the arbitrage window opens wider and Western markets scramble for supply. The optimal strategy is a barbell approach: lock in a base volume at fixed price for Q3 consumption, but keep the balance of purchasing on a floating or quarterly-linked basis to capture potential H2 downside. Watch LME-SHFE spreads daily as the leading indicator for the Chinese export decision.