LME three-month zinc settled at $3,529 per metric ton on July 8, down a modest $31 or 0.87%, but stubbornly holding above the $3,400-3,500/t range that has served as a floor since April 2026. SHFE zinc at ¥24,875/t was up ¥95, reflecting modest Chinese domestic support. The price sits in uncomfortable territory: well above the $2,900/t full-year average that Morgan Stanley and several fundamental models project, and well above the levels implied by a 271,000-tonne refined surplus, yet justified by exchange inventory levels that remain dangerously thin. The market is pricing the physical reality of near-empty LME warehouses more than the forward promise of surplus metal that has not yet materialized.
The International Lead and Zinc Study Group (ILZSG) published its October 2025 forecast, the most recent full-year outlook, projecting refined zinc demand of 13.86 million tonnes in 2026 (+1.0% year-on-year) against production of 14.13 million tonnes (+2.4%). That arithmetic yields a surplus of approximately 271,000 tonnes — the largest in several years and a sharp reversal from the small deficits recorded in 2024-2025. The supply growth is driven by a recovery in mine output, which jumped 4.8% in 2025 after three consecutive years of contraction, with new concentrate coming from Brazil, Canada, Norway, and China. On paper, the market should be loosening.
But the physical evidence contradicts the paper surplus. LME zinc inventories stood at roughly 107,000 tonnes as of mid-April 2026, a modest recovery from the November 2025 low of 33,825 tonnes but still critically low in historical context. ILZSG has noted that LME stocks in early 2026 covered “less than three days” of global demand. Fastmarkets describes the market as a “tale of two halves”: China has significant surplus refined zinc, with domestic inventories rising at SHFE warehouses, while the rest of the world faces a shortfall of deliverable metal. Chinese refined zinc exports hit a three-year high in October 2025, but logistics bottlenecks and thin arbitrage margins have slowed the rebalancing. The metal exists — it is just in the wrong place.
Morgan Stanley’s December 2025 zinc outlook is the most explicitly bearish among major institutions, forecasting a $2,900/t average for 2026. The bank’s thesis rests on two pillars: first, that LME inventories will rebuild as China exports more refined zinc and mine supply continues to grow; second, that demand growth of roughly 1% globally is too modest to absorb the incremental supply, especially with Chinese real estate — the largest end-use sector via galvanized steel — remaining in structural decline. If Morgan Stanley is right, zinc at $3,529/t represents a roughly 22% premium to fair value that will compress over the next 12 months.
Countering the bearish view, a cohort of more bullish analysts — including calls from Goldman Sachs, Citi, and Macquarie cited in market commentaries — see supply-shortage risk keeping zinc in a $3,200-3,600/t range through 2026, with potential spikes toward $4,000/t if LME stocks fall to critically low single-digit thousands of tonnes. The bull case leans heavily on the geographic mismatch: as long as Chinese surplus metal cannot efficiently reach LME warehouses due to logistics, export restrictions, or unfavorable arbitrage, the LME contract will continue to price off the ex-China physical tightness, not the global surplus.
The mine supply recovery that underpins the surplus narrative is real but incomplete. ILZSG data confirms global zinc mine output rose 4.8% in 2025, ending a three-year contraction driven by exhaustion at major mines and environmental closures in China. New production from Brazil’s Aripuanã ramp-up, Canada’s Caribou restart, and Norwegian expansions has increased concentrate availability. This has begun to shift the terms of trade between miners and smelters: treatment charges (TCs), the fees smelters charge miners to process concentrate, are expected to rise in 2026 as concentrate supply loosens, improving smelter margins and incentivizing higher refined output. But the flow from mine to refined metal to LME warehouse takes months, and in the interim, the visible inventory remains dangerously thin.
China is the pivot point. The country accounts for roughly half of global zinc consumption, primarily through galvanized steel used in construction and infrastructure. ILZSG forecasts Chinese refined zinc usage to be roughly flat in 2026, as ongoing real estate weakness offsets modest growth in infrastructure and automotive galvanizing. On the supply side, Chinese refined zinc production is expected to rise about 3% in 2026 on new smelter capacity, pushing China toward self-sufficiency and potentially turning it into a net exporter. Fastmarkets reports that Chinese zinc smelters are stockpiling refined metal, and Chinese long-term 2026 zinc ingot contracts were signed at small premiums of just 10-40 CNY/t over the prior year — a stark contrast to the elevated premiums seen in Europe and the US.
European and North American zinc buyers face a different reality. Physical premiums for special high-grade zinc in Europe remain elevated, driven by the same CBAM and energy-cost dynamics reshaping aluminum markets, plus the added pressure of very low LME inventory. Any smelter outage in Europe — and European zinc smelters have been prone to curtailments during energy price spikes — could rapidly drain remaining LME stocks and trigger a price spike. The market’s vulnerability is a function of low visible inventory, not a function of global mine supply, and that makes it a market where surprises travel fast and violently.
Zinc procurement strategy for H2 2026 must reconcile the contradictory signals of a forecast surplus and a physically tight market. For Q3, prices at $3,500+/t look rich relative to a $2,900-3,100/t fair value per fundamental models, but the low-LME-stock reality means short-squeeze risk is real. Do not position for an imminent price collapse; LME stocks at 107,000 tonnes can be halved in a single delivery disruption. Instead, use the current elevated price environment to lock in supplier commitments and secure allocation from reliable smelters, particularly if you are sourcing ex-China metal. For Q4 and into 2027, the balance of risk shifts: if Chinese exports accelerate, LME inventories rebuild, and mine supply growth feeds through to refined output, prices should gravitate toward $2,900-3,200/t. Structure H1 2027 contracts with flexible pricing — floating or index-linked with a cap — rather than fixing at current elevated spot levels. Monitor three triggers for tactical decisions: (1) LME inventory changes — a sustained build above 150,000 tonnes would signal the surplus is finally arriving at exchange warehouses; (2) Chinese export data — monthly refined zinc exports above 15,000 tonnes would confirm the surplus is mobile; (3) SHFE/LME arbitrage — a widening LME premium over SHFE would pull more Chinese metal westward. Galvanizers and die-casters with steady quarterly demand should ladder purchases over the next 6-9 months, averaging into what most analysts expect to be a declining price curve.