The London Metal Exchange (LME) zinc market has erupted into one of its most volatile phases in recent years, as short-sellers face a painful squeeze triggered by collapsing inventories and unexpected regional supply tightness.
LME zinc time-spreads flared to record highs this week, with cash premiums surging above $300 per ton — the tightest conditions since the special high-grade contract was launched in the late 1980s.
For months, traders assumed that falling exchange stocks were misleading, masking a global supply surplus. Yet, registered LME inventories have now plunged to just 35,300 metric tons — barely enough to cover one day of global consumption — with few arrivals despite strong cash incentives.
The result: bears are paying heavily for mistimed bets, as zinc flows out of LME warehouses and fails to reappear in the shadow system that usually feeds re-warranting cycles.
From Singapore to Shortage
A year ago, over 300,000 tons of zinc sat in LME warehouses, most of it in Singapore, where warehouse operators fought for storage revenue. But since early 2025, zinc leaving LME stocks has not stayed within the warehousing ecosystem. Instead, Singapore’s export data shows rising refined zinc shipments to distant destinations such as Djibouti and Guatemala, signaling that material has been released into global circulation rather than stored for re-entry.
Smelters Power Down Outside China
The International Lead and Zinc Study Group (ILZSG) notes that while zinc mine output is rebounding, smelters in Western economies are curtailing production or shutting down completely. Global refined zinc output is expected to rise 2.7% in 2025, driven entirely by China’s 6.2% production surge, while elsewhere capacity is shrinking — including closures at Toho Zinc’s Annaka smelter (Japan) and Glencore’s secondary zinc operations (Italy).
That means the supposed global surplus — a modest 85,000 tons this year — exists almost entirely within China. Outside Asia, physical tightness is acute, driving a widening London premium over the Shanghai Futures Exchange price.
Surplus Tomorrow, Pain Today
Chinese exports could help rebalance the LME market, but physical arbitrage takes time, leaving short position holders scrambling for immediate metal. Currently, six major long holders control cumulative cash positions exceeding three times available LME stocks.
The overnight “tom-next” spread — the cost to roll short positions — has jumped to $30 per ton, underscoring the intense pressure.
While analysts expect a major surplus of 271,000 tons in 2026, for now the market remains brutally tight. As one trader put it, “The surplus may be coming — but not where, or when, the shorts need it.”
