Zinc has become one of the clearest examples of why headline supply balances can mislead in fragmented metals markets. ILZSG has reversed its 2026 outlook from a 271,000-tonne refined surplus to a 19,000-tonne deficit, while tight concentrate availability, Western smelter disruption and low LME inventories have pushed London zinc sharply higher. Yet the latest data still show a sizeable refined surplus in the opening months of the year, concentrated largely in China. The central question is therefore not simply whether zinc is in surplus or deficit, but whether Chinese metal can relieve Western scarcity before pressure on smelter margins constrains the supply response.
TL;DR
- ILZSG has revised its 2026 refined zinc balance from a 271,000-tonne surplus to a 19,000-tonne deficit — a roughly 290,000-tonne reassessment in six months.
- The latest realised data complicate that forecast: January–May still produced a roughly 145,000-tonne global refined surplus, as output rose 3.5% against demand growth of only 1.5%.
- The surplus is geographically concentrated. SHFE zinc inventories have more than doubled this year to 155,954 tonnes, while immediately available LME metal remains comparatively scarce.
- Chinese metal is beginning to respond: roughly 17,000 tonnes have recently moved onto LME warrant, with Hong Kong accounting for around two-thirds of the inflow.
- Mine-supply growth slowed to just 1.1% YoY in January–May, while Chinese imported-concentrate treatment charges have fallen to around minus $117.50/t.
- Western processing has suffered additional disruption at Kazzinc in Kazakhstan and Cajamarquilla in Peru, facilities representing roughly 600,000 tonnes of annual capacity combined.
- Investment funds now hold more than 110,000 tonnes of long zinc exposure, the largest collective bullish position since the LME began publishing its current positioning series in 2018.
Market Overview
Zinc's 2026 rally was not supposed to happen.
When ILZSG met in October 2025, it expected the global refined market to produce a 271,000-tonne surplus in 2026. Weak construction demand, recovering mine production and expanding Chinese smelter capacity appeared to point towards greater availability and lower prices.
Six months later, that outlook had changed dramatically.
ILZSG's April assessment instead forecast a 19,000-tonne deficit, representing a swing of roughly 290,000 tonnes from its previous estimate.
London zinc has responded accordingly.
LME three-month zinc reached $3,858/t on 25 August, its highest level in four years, while the cash premium over three-month delivery widened as far as $131/t.
The move reflects more than a revised annual forecast.
Low London inventories, Western smelter disruptions and exceptionally poor concentrate economics have collided with an increasingly aggressive financial position. Investment funds have accumulated more than 110,000 tonnes of long exposure, the largest collective bullish position in the LME's current reporting series.
But there is an important complication.
The latest realised global data do not yet look like a conventional deficit.
From 271,000-Tonne Surplus to 19,000-Tonne Deficit
The scale of ILZSG's forecast revision deserves attention.
A 271,000-tonne expected surplus becoming a 19,000-tonne deficit in six months illustrates the degree of uncertainty surrounding zinc's supply response.
The principal issue has been processing rather than an outright collapse in mine production.
Global zinc mine output rebounded 4.8% in 2025 after three consecutive years of contraction. Yet refined zinc production increased by only 1.7%, with all of that growth coming from China, where output rose 6.7%. Western refined production contracted as closures, operational disruption and poor treatment economics restricted smelter output.
That divergence has continued into 2026.
Kazzinc's smelter in Kazakhstan suffered a fatal explosion in May and subsequently operated at reduced capacity. Nexa suspended operations at Cajamarquilla in Peru following a fire later that month.
Together, the two facilities represent approximately 600,000 tonnes of annual zinc production capacity.
The resulting market is therefore increasingly divided between a comparatively well-supplied China and a much tighter Western system.
The Surplus Hasn't Entirely Disappeared
This is where the zinc story becomes more complicated.
Despite ILZSG's full-year deficit forecast, its January–May statistics show global refined zinc production increasing 3.5% YoY, while consumption rose only 1.5%.
The result was a surplus of approximately 145,000 tonnes during the first five months of 2026.
That is not necessarily inconsistent with a full-year deficit.
It means the balance would need to tighten substantially during the remainder of the year.
More importantly, the surplus is concentrated geographically.
Most of the increase in refined output has occurred in China. SHFE stocks have more than doubled since the beginning of the year to 155,954 tonnes.
The latest SMM physical-market data reinforce that point. Seven-region Chinese zinc ingot inventories stood at 269,900 tonnes on 27 August, essentially unchanged from the previous Thursday.
China is not currently behaving like a market suffering acute physical scarcity.
London is.
That distinction is central to the zinc thesis.
The Concentrate Squeeze
The strongest fundamental argument for tighter zinc lies further upstream.
Mine-supply growth is losing momentum.
After the 4.8% recovery in 2025, global mine production increased just 1.1% YoY during January–May 2026.
Competition for available zinc concentrates has consequently become intense.
Spot treatment charges for Chinese imported concentrate have fallen to approximately minus $117.50/t, according to SMM data cited by Reuters.
Treatment charges are a critical part of smelter economics. When concentrate is abundant, miners pay processors more to convert it into refined metal. When concentrate becomes scarce, those terms collapse.
Negative treatment charges therefore represent a striking inversion of the normal relationship.
Chinese smelters have so far continued producing strongly despite that pressure.
Whether they can continue doing so is one of the most important questions for the remainder of 2026.
If operating rates remain high, China can continue producing the refined metal capable of relieving Western scarcity.
If margins eventually force production cuts, the global refined balance could tighten rapidly.
Kipushi: More Metal, But Not Necessarily More Availability
The DRC provides a useful example of why mine production alone does not determine market availability.
Ivanhoe Mines' Kipushi operation has been ramping rapidly and is emerging as an increasingly important source of zinc concentrate.
Production reached a record 70,177 tonnes of zinc in concentrate in Q2, taking first-half production to 135,221 tonnes. Full-year guidance remains 240,000–290,000 tonnes.
But logistics matter.
At the end of the quarter, approximately 44,000 tonnes of zinc in concentrate remained unsold, illustrating the distinction between material being produced and material actually reaching customers.
That is particularly relevant in the current zinc market.
A mine can meet production guidance without immediately solving a concentrate shortage elsewhere in the system.
Infrastructure, transport corridors, processing availability and commercial terms determine how quickly additional mined tonnes translate into refined supply.
China Is Both the Solution and the Risk
China now occupies an unusual position in the global zinc market.
It holds much of the world's incremental refined supply and therefore represents the most obvious source of metal capable of relieving London.
But its smelters are simultaneously exposed to the concentrate shortage threatening future refined production.
Trade flows have already begun responding to the price differential.
China historically imported substantial quantities of refined zinc — as much as 445,000 tonnes in 2024. Imports fell by roughly a third in 2025 as domestic smelter capacity expanded.
China subsequently became a temporary net exporter late last year and did so again in July 2026.
July exports reached approximately 9,200 tonnes, leaving the country a net exporter of around 4,100 tonnes.
Some of that metal is moving directly towards the LME system.
Around 17,000 tonnes have recently been warranted, with Hong Kong accounting for roughly two-thirds of those deliveries. On-warrant LME inventory has consequently stabilised around 95,000 tonnes.
Hong Kong is becoming an important bridge between China's relatively abundant refined market and London's scarcity.
Whether that bridge can move sufficient volume is now central to the market.
Western Smelters Remain the Weak Link
The geographic divergence would matter less if Western refined production were responding strongly.
It isn't.
Kazzinc and Cajamarquilla are the most visible recent disruptions, but they sit within a broader period of pressure on non-Chinese smelting.
Weak treatment charges have reduced processing margins, while operational interruptions and closures have restricted the ability of recovering mine supply to translate into Western refined metal.
ILZSG expects Chinese refined production to increase 3.0% in 2026, compared with just 1.4% growth globally. Importantly, those forecasts preceded the May disruptions in Kazakhstan and Peru.
The result is an increasingly bifurcated market.
China has metal.
The Western market needs it.
The arbitrage between those two systems is increasingly determining price.
Geopolitical & Policy Risk
Zinc's mining geography is more diversified than several other critical metals, but emerging-market exposure remains significant.
The DRC is becoming more important through Kipushi, while Peru remains both a major mining jurisdiction and home to the Cajamarquilla smelter. Kazakhstan's Kazzinc disruption demonstrates the importance of Central Asian refined production.
This creates exposure to infrastructure, energy availability, operating reliability and changes in mining policy across several jurisdictions.
The DRC's broader push towards greater domestic participation and processing of mineral resources also warrants monitoring.
However, policy affecting copper or cobalt should not automatically be assumed to extend to zinc.
For zinc, the more immediate issue remains whether new mine production can move efficiently through logistics networks and into global smelting capacity.
Emerging Market Implications
The current structure creates different outcomes for miners and processors.
Concentrate scarcity generally improves the negotiating position of mine producers while weakening the economics of smelters.
That potentially favours zinc-producing jurisdictions including Peru and the DRC through stronger mineral export revenues, provided production and logistics remain reliable.
For China, the effect is more complicated.
The country benefits from having the refined metal that international markets increasingly require, creating potential export opportunities when arbitrage economics are favourable.
At the same time, Chinese smelters are absorbing much of the margin pressure created by exceptionally weak treatment charges.
The economic value within the zinc supply chain is therefore shifting upstream.
For emerging-market investors, that distinction may matter more than the outright zinc price: resource ownership and processing capacity currently have very different economics.
Bloodstone View
The most important zinc number this year may not be the price.
It is 290,000 tonnes.
That is approximately how far ILZSG's 2026 balance assessment moved between October and April — from a projected 271,000-tonne surplus to a 19,000-tonne deficit.
Such a large revision tells us something important about this market.
The zinc supply response is proving considerably less predictable than headline mine-production numbers suggested.
Yet it would be equally wrong to conclude that the world is simply running out of zinc.
January–May still produced a sizeable refined surplus. Chinese inventories remain substantial. Domestic Chinese zinc stocks are not currently drawing at a rate consistent with acute scarcity.
The constraint sits between stages and regions of the supply chain.
Mine production must become concentrate.
Concentrate must reach a smelter.
Smelters must be economically willing and operationally able to process it.
Refined metal must then reach the region in which it is required.
At several of those points, zinc is experiencing friction.
This leaves China simultaneously acting as the market's relief valve and one of its largest risks.
Its refined inventory can replenish London.
But the ability to keep producing that inventory depends partly on smelters continuing to operate despite exceptionally poor concentrate economics.
The next phase of the zinc market therefore depends on which process moves faster:
Chinese refined metal reaching London, or concentrate scarcity reaching Chinese smelter output.
The latest evidence does not yet settle that question.
That is precisely why the China-London inventory relationship matters more than a simple surplus-versus-deficit label.
Outlook
The zinc outlook remains unusually dependent on the interaction between regional inventories, concentrate availability and smelter operating rates rather than on any single global balance estimate.
Base case: London availability remains relatively constrained while Chinese exports gradually provide some relief. Tight concentrate economics limit the ability of refined supply to expand aggressively, leaving the market sensitive to changes in warehouse flows and processing disruptions.
Upside risk: Further Western smelter disruption, reduced Chinese operating rates or sustained declines in LME inventory would indicate that concentrate tightness is translating more decisively into refined-metal scarcity. A simultaneous decline in Chinese inventories would provide stronger evidence that the current regional imbalance is broadening.
Downside risk: Accelerating Chinese exports and a sustained rebuild in LME stocks would weaken the immediate scarcity premium. Improving treatment charges or stronger mine-supply growth would further suggest that the concentrate constraint is beginning to ease.
What would change the view: The most important confirmation would come from inventories moving in the same direction across China and London. Falling stocks in both markets would strengthen the tightening thesis. A sustained LME rebuild while Chinese inventories remain elevated would point towards normalisation of the current geographic dislocation.
Investment Implications
Rather than treating higher zinc prices as a uniform positive across the industry, the current structure argues for distinguishing between different parts of the supply chain.
Upstream producers potentially benefit from scarce concentrate and stronger negotiating economics, although operational delivery and jurisdiction remain critical.
Smelters face a more difficult environment where elevated refined-metal prices can coexist with compressed processing margins.
Integrated producers require closer examination of where within the value chain their earnings are actually generated.
Physical and futures markets remain particularly sensitive to China-London flows. Changes in warranting and regional inventories may therefore provide more useful information than outright price momentum alone.
These are analytical distinctions rather than recommendations; individual exposures depend materially on company balance sheets, cost structures, hedging, jurisdiction and valuation.
Key Risks
- Chinese refined exports accelerate: A sustained increase in metal reaching LME warehouses would reduce the regional scarcity underpinning nearby tightness.
- Chinese smelter production falls: Persistent concentrate pressure could eventually reduce operating rates, materially tightening the refined balance.
- Mine supply improves faster than expected: Stronger concentrate availability would improve treatment economics and allow smelters to respond.
- Western operational disruptions persist: Further outages would reinforce the geographic split between China and the rest of the market.
- Demand weakens: Zinc remains highly exposed to galvanised steel, construction and manufacturing. Supply constraints do not eliminate cyclical demand risk.
- Positioning unwinds: More than 110,000 tonnes of investment-fund length means a change in the physical signal could be amplified through financial positioning.
- Balance estimates are revised again: The magnitude of ILZSG's previous adjustment itself demonstrates why annual surplus or deficit forecasts should not be treated as fixed outcomes.
Intelligence Monitoring Points
- ILZSG monthly balances: The trajectory from the roughly 145,000-tonne January–May surplus towards the projected full-year deficit is now a critical test.
- LME zinc inventories: A sustained rebuild would indicate that international scarcity is easing.
- Chinese seven-region inventories: The current 269,900-tonne level provides a useful baseline for assessing whether domestic physical conditions are tightening.
- SHFE stocks: The current pool of approximately 155,954 tonnes remains an important potential source of exportable metal.
- Hong Kong LME warranting: Continued inflows would demonstrate that the China-to-London arbitrage remains effective.
- Chinese refined exports: July's shift back to net exports needs to persist before it can materially change Western availability.
- Treatment charges: The current deeply negative level is one of the clearest indicators of stress in concentrate availability.
- Chinese smelter operating rates: Production cuts would provide evidence that concentrate scarcity is finally feeding through into refined output.
- Kipushi production and logistics: Rising mine output matters most when concentrate can actually be delivered into the processing system.
- Western smelter operations: Kazzinc and Cajamarquilla remain useful indicators of whether non-Chinese refined capacity is normalising.
FAQ
Q: Is the global zinc market currently in deficit? A: ILZSG's latest full-year forecast points to a small 19,000-tonne deficit in 2026. However, realised January–May data showed a roughly 145,000-tonne surplus. The distinction between year-to-date data and the full-year forecast is important.
Q: Why did the outlook change so dramatically? A: Refined supply outside China has been weaker than expected because of operational disruption and poor smelter economics. ILZSG moved from forecasting a 271,000-tonne 2026 surplus last October to a 19,000-tonne deficit in April.
Q: Why can zinc be tight in London when China has substantial inventory? A: Because global inventory is not automatically globally available. Freight, arbitrage economics, warehouse eligibility and trade flows determine whether Chinese refined zinc can actually relieve LME scarcity.
Q: Is concentrate or refined zinc currently the bigger structural constraint? A: Concentrate availability appears to be the more important upstream constraint. Chinese imported-concentrate treatment charges around minus $117.50/t indicate severe competition for mined material.
Q: What role does China play? A: China is both the principal source of recent refined production growth and the most obvious source of metal capable of replenishing LME stocks. It is therefore simultaneously the potential solution to Western scarcity and a risk if poor smelter economics eventually reduce Chinese output.
Q: What would strengthen the tightening thesis? A: Sustained LME inventory draws accompanied by falling Chinese stocks and evidence of Chinese smelter production cuts. That combination would suggest the problem is moving beyond geographic fragmentation towards broader physical tightness.
Q: What would weaken it? A: Accelerating Chinese exports, rebuilding LME inventories and recovering treatment charges would indicate that the supply chain is successfully responding to the current scarcity.
Q: What is the most important signal to watch now? A: The interaction between China-to-LME metal flows and Chinese smelter operating rates. The first determines how quickly today's scarcity can be relieved; the second determines how long China can continue providing that relief.
This document is published by Bloodstone Research for informational and institutional research purposes only. It does not constitute investment advice, an investment recommendation, an offer or solicitation to buy or sell any financial instrument, commodity or security, or a forecast of future performance. Market conditions and data may change without notice. Readers should conduct their own analysis and, where appropriate, seek independent professional advice before making investment decisions. For institutional enquiries contact research@bloodstonecapital.co.uk.