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As of October 21, the zinc price on the London Metal Exchange (LME) has firmly breached the $3,000 per tonne mark, approaching the year-to-date high of $3,050 touched earlier this month. This surge in zinc prices is not an isolated event but is driven by the refined zinc market experiencing its most severe supply crunch in decades. A spot squeeze triggered by critically low inventories has become the dominant market force.
The current market focus is on the staggering spot premium. The premium of LME spot zinc prices over the three-month futures contract has soared to $323 per tonne, the highest level since records began in 1997. This structure, known as “backwardation,” is a classic sign that spot demand far exceeds supply.
Meanwhile, the tom-next spread—the cost of rolling positions forward by one day—also briefly reached a high of $30 per tonne. This indicates that short sellers, unable to deliver physical metal, are being forced to cover their positions at high costs, highlighting intense market tension.
The fundamental driver behind the strong zinc price is the ongoing tightness in the refined zinc supply chain. Data compiled by the International Lead and Zinc Study Group shows that despite a 6.3% increase in global mined zinc output this year, refined zinc production has fallen by over 2%. This contradictory phenomenon confirms production constraints at smelters in places like Kazakhstan and Japan. Notably, the closure of the key Toho Zinc Annaka plant in Japan has significantly impacted global refined zinc supply.
Meanwhile, zinc market inventories have reached near-depletion levels. The most direct manifestation of the supply bottleneck is the stock in LME-registered warehouses. Data shows that zinc inventories have plummeted to less than 24,500 tonnes, a drop of nearly 90% compared to the 230,500 tonnes at the start of the year. The current stock level is insufficient to meet even one day of global consumption demand, creating a historic low.
As the market structure deteriorates, LME warrant holdings reports reveal that six separate entities hold large long positions expiring soon, with their combined positions entitling them to at least 300% of the readily available zinc stock in the LME warehouse system. This means a large number of long holders have the right to claim far more metal than is physically available, cornering the short sellers.
As Al Munro, senior base metals strategist at Marex, stated, “The reality is the backwardations on the LME are yet to attract material and stock inflows.” This indicates the structural nature of the supply problem is deeply entrenched.
Looking ahead, extremely low inventories make the market highly sensitive to any supply disruptions. Duncan Hobbs, head of research at Concord Resources Ltd., pointed out: “Stocks are at a very low level and the physical market feels finely balanced outside of China.”
A potential variable comes from China. As domestic smelters maintain production, the widened price spread between the Shanghai Futures Exchange and the LME may incentivize Chinese smelters to conduct rare zinc exports for arbitrage, potentially bringing short-term relief to the LME market. However, whether this can truly reverse the global structural supply tightness remains to be seen.
In summary, the London zinc price breaching $3,000 is the result of combined factors: hindered refined zinc production, depleted global inventories, and a financial squeeze in the market. Until inventories are effectively rebuilt, the strong trend in zinc prices is expected to persist, with market volatility risks significantly heightened due to the fragile balance.
