Chinese exports help ease the pain for London zinc shorts

LONDON, Aug 25 (Reuters) - The London zinc market remains a dangerous place for bears.

The metal that everyone thought would go down in price this year is marching ever higher. London Metal Exchange (LME) three-month zinc hit a fresh four-year peak of $3,858 per metric ton on Tuesday morning.

More worryingly for zinc short-position holders, the relentless ​rally is being accompanied by a sharp contraction in LME time-spreads.

The premium for cash metal over three-month delivery has flexed out to $131 per ton, a flashback to last October ‌when it hit a record-breaking high of $323 per ton.

Low LME inventory was the trigger for last year's squeeze and is the reason the market is tightening again.

The good news for LME shorts is that help may be on its way. China has started lifting exports, dispatching metal straight to LME warehouses in Hong Kong.

A TALE OF TWO MARKETS

It's not as if zinc demand has been booming. The International Lead and Zinc Study Group (ILZSG) estimates global usage grew by ​a modest 1.5% year-on-year from January to May.

Refined metal output grew faster, at 3.5%, leading the Group to assess a global supply surplus of around 145,000 tons in the first five ​months of the year.

The catch, however, is that most of the refined production growth came from China, as was the case last year. Western smelters have ⁠suffered a string of supply hits and are under extreme margin pressure due to the collapse in treatment terms.

Most of the surplus metal, therefore, is also in China.

Stocks registered with the Shanghai Futures ​Exchange have more than doubled to 155,954 tons since the start of January.

LME stocks, including those sitting in off-warrant storage, are still 6,500 tons lower at 124,677 tons despite the recent daily deliveries into ​LME warehouses.

HONG KONG FAST-TRACK

There has been daily warranting action since the start of last week as the rising LME premium for cash delivery draws metal into the system.

Volumes have totalled a modest 17,000 tons so far, but they've been enough to stabilise on-warrant inventory around the 95,000-ton level.

There has also been a build in off-warrant stocks, which have risen from a July low of 15,480 tons to 29,627 tons.

Hong Kong has accounted for around two-thirds of the ​deliveries onto LME warrant and holds another 5,000 tons in off-warrant storage.

The LME approved the city for good delivery in January last year, and the first warehouse only opened for business in July, but Hong ​Kong is clearly already acting as a fast-speed conduit for physical arbitrage.

China has historically been a big importer of refined zinc. Volumes were as high as 445,000 tons as recently as 2024.

But domestic smelter capacity has grown to ‌the point ⁠that the country is approaching self-sufficiency.

Imports fell by a third to 299,000 tons last year and China turned net exporter in both November and December, delivering metal to LME warehouses in Singapore and Taiwan to profit from the cash squeeze on the London market.

It turned net exporter again in July to the tune of 4,100 tons as outbound volumes rose to 9,200 tons and imports continued to tumble, according to local data provider Shanghai Metal Market (SMM).

The pace of arrivals is clearly slower this time around.

So far.

TURNING BULLISH

Bulls are betting that even China's smelters will have to rein back operating rates as bombed-out ​treatment charges compress margins.

And there are plenty of ​zinc bulls back in town. Investment funds have ⁠accumulated over 110,000 tons of long positions, by some margin the largest collective bet on higher prices since the LME started publishing its positioning reports in 2018.

Rekindled enthusiasm for zinc is also evident in the LME options market. There are almost 1,500 lots of open interest on December calls at ​a strike price of $4,000 per ton and another 757 lots at the $4,500-per-ton strike.

The bull narrative is one of restricted mine supply. After three consecutive years ​of decline, global mine production jumped ⁠by 4.8% last year. However, the impetus has quickly faded this year, with annual growth slowing to just 1.1% from January to May, according to ILZSG.

The competition for mined concentrates has been so fierce that spot treatment charges for Chinese imports are now sitting at a record low of minus $117.50 per ton, according to SMM.

Yet China's smelters are battling on. Growth was still "significant" in the first five months of 2026, according to ILZSG.

Just how significant ⁠will be the ​key for both LME bulls and, more urgently, LME short-position holders.