Understanding the Zinc Market: Why Low LME Stocks Aren't Moving Prices
In the paradoxical world of commodity trading, traditional indicators sometimes lose their predictive power. Nowhere is this more evident than in today's zinc market and low LME stocks, where critically low London Metal Exchange (LME) inventories have failed to trigger the price rally that conventional market wisdom would expect. This disconnect between fundamental indicators and market pricing has left many traders scratching their heads—and potentially reveals deeper structural changes in how the global zinc market functions.
What's Happening with Zinc Market Inventories?
Current LME Zinc Stock Situation
LME-registered zinc inventory has plummeted to a concerning two-year low of 78,475 metric tons as of mid-2025. Even more striking, available stocks (those not already earmarked for delivery) stand at just 45,700 tons—a fraction of what market participants would typically consider comfortable operating levels.
The geographical distribution of these remaining inventories presents additional complications. The bulk of what little zinc remains in LME warehouses is predominantly located in Singapore, creating potential logistical challenges for buyers in other regions.
To put these figures in stark perspective, current LME zinc stocks would cover barely one day's worth of global zinc consumption—a situation that historically would have triggered panic buying and steep price increases. Even more concerning for traditional market analysts, LME zinc stocks have been declining consistently for seven consecutive months, creating what should be textbook conditions for a price surge.
The Disconnect Between Stocks and Prices
Despite these seemingly bullish inventory signals, zinc prices have dramatically underperformed all other base metals in 2025. The metal is currently trading approximately 4% below its year-start price, creating a glaring disconnect between inventory levels and market valuation.
Time-spreads—the price difference between immediate and future delivery—tell an equally confounding story. Despite severely depleted physical stocks, the market remains in a small contango (where future prices exceed spot prices), rather than the backwardation (premium for immediate delivery) typically associated with physical scarcity.
The cash-to-three-months spread has tightened from over $30 per ton earlier in the year to just $5 per ton currently—hardly the sign of a market concerned about immediate supply. This stands in stark contrast to previous periods when similarly low inventory levels produced significant backwardation, with buyers willing to pay substantial premiums for immediate delivery.
"The wide divergence between spread and stock signals suggests there is no real panic because no one thinks the physical supply chain is that tight," notes one market analyst who follows zinc closely.
Why Are Zinc Stocks So Low?
Singapore's Role in Zinc Inventory Movements
Singapore has emerged as the focal point for zinc inventory movements since late 2023, when stocks jumped dramatically from 58,000 tons to over 200,000 tons in November of that year. This initial surge raised eyebrows among market participants.
What's become increasingly clear is that much of this metal has been "churning"—moving in and out of warehouses as traders play warehouse arbitrage, capitalizing on storage incentives rather than responding to genuine physical demand or supply signals. This created a misleading picture of actual market conditions.
The scale of this activity is remarkable: Singapore's zinc exports in the first half of 2025 have already matched the full-year 2024 totals of 153,000 tons. Meanwhile, inbound shipments have slowed dramatically to 27,000 tons from 82,000 tons in the second half of 2024—suggesting the arbitrage play may be winding down.
In 2024 alone, a staggering 691,500 tons of zinc were delivered in and out of LME warehouses in Singapore, resulting in a net increase of just 35,550 tons. This level of churn creates significant "noise" in the inventory data that can mask the true state of physical market balance.
Supply Chain Disruptions Driving Stock Movements
Beyond financial arbitrage, there's a physical market explanation for why LME stocks have been drawn down: they've been filling supply gaps created by a series of significant smelter disruptions across the globe.
Among the most notable disruptions:
- Toho Zinc permanently closed its Annaka smelter in Japan, removing a long-standing source of refined zinc supply
- Youngpoong's Seokpo plant in South Korea faced a 58-day operational halt after regulatory issues related to water discharge violations
- Nyrstar reduced output at its Hobart smelter in Australia by approximately 25% since March
- Glencore shuttered part of its Portovesme smelting complex in Italy in late 2024
These production cuts across multiple continents created regional supply chain gaps that LME stocks have helped fill, contributing to the consistent drawdown in exchange inventories. Furthermore, the smelter shutdown impact continues to reverberate through commodity markets globally.
Why Isn't the Market Responding to Low Stocks?
The Surplus Narrative Dominating Market Sentiment
The most compelling explanation for zinc's price underperformance lies in widespread market conviction that we're entering a period of significant surplus. According to International Lead and Zinc Study Group data, the global zinc market has already registered nearly a 90,000-ton surplus in the January-May 2025 period alone.
Market consensus strongly anticipates this surplus will continue growing through the remainder of the year and into 2026. With financial traders and physical market participants both positioning for this expected oversupply, immediate inventory concerns have been largely dismissed. This pattern of surplus-induced price decline has been observed in other commodity markets as well.
Demand factors are equally important in this equation. Zinc consumption is heavily tied to construction activity through its use in galvanized steel. With construction activity weak across most major economies, zinc demand is at best flat-lining rather than growing—another reason surplus material is expected to eventually materialize.
"Zinc demand is doing no more than flat-lining due to weak construction activity just about everywhere," notes a Reuters market analyst, capturing the sentiment that's keeping prices subdued despite low inventories.
China's Production Surge Offsetting Western Smelter Issues
While Western smelters have faced various disruptions, Chinese refined zinc production has been accelerating. Output rose 4% year-over-year in January-July 2025 and is forecast to accelerate to 7% year-to-date growth in August, according to data from Shanghai Metal Market.
This production growth is supported by improving economics for smelters. Treatment charges—the fees miners pay smelters to process zinc concentrate into refined metal—have recovered from negative territory earlier in the year to a more sustainable $82.00 per ton.
China's appetite for raw materials is equally impressive, with imports of zinc concentrates jumping 48% year-over-year in the first half of 2025. This surge in Chinese processing capacity has been further supported by new mines ramping up production, including significant projects like Kipushi in the Democratic Republic of Congo and Ozernoye in Russia.
The catch, however, is that very little of China's growing zinc production is currently finding its way to international markets. Chinese exports of refined zinc totaled just 12,700 tons in the first half of 2025—significant, but not enough to ease tightness in Western markets where smelter disruptions have created regional supply gaps. The iron ore trends provide an interesting parallel to zinc market dynamics.
How Have LME Zinc Stocks Historically Misled Markets?
The History of False Signals in Zinc Inventories
This isn't the first time LME zinc stocks have sent misleading signals to market participants. Throughout 2024, Singapore's zinc stock churn created constantly shifting optics that alternated between bullish and bearish signals depending on the warehouse rotation cycle.
The magnitude of this activity has diminished the utility of LME warehouse inventory as a reliable market indicator. When 691,500 tons of metal move in and out of warehouses in a single location over a year, resulting in a net change of just 35,550 tons, the signal-to-noise ratio becomes problematic for analysts trying to discern true market conditions.
"LME zinc stocks have flattered to deceive the unwary," notes a veteran market observer, highlighting how financial incentives for stock movements can create inventory patterns divorced from physical market fundamentals.
The April 2025 Stock Movement Pattern
A particularly dramatic example occurred in April 2025, when almost 90,000 tons of zinc were warranted (delivered into LME warehouses) in just two days. This sudden inventory surge briefly calmed market concerns about low stocks.
However, movement since then has been predominantly one-way, with consistent outflows reducing inventory by 144,250 tons since January 2025. Unlike previous cycles, there has been no offsetting rise in off-warrant inventory (metal stored in LME-approved warehouses but not on warrant).
Total off-warrant stocks currently stand at just 16,472 tons, with only 4,842 tons remaining in Singapore—a sharp departure from previous patterns where metal would move between on and off-warrant status depending on financing incentives.
What's Driving Market Confidence Despite Low Stocks?
Technical Market Factors Influencing Zinc Prices
Several technical market factors may explain why spreads remain relatively relaxed despite critically low inventories. Exchange lending guidance could be influencing spread dynamics, preventing the extreme backwardation that might otherwise occur.
LME reports show two significant long positions on the cash date, equivalent to at least 90% of currently available stocks. However, these positions haven't created the spread tightness typically associated with such concentrated holdings.
This wide divergence between spread and stock signals suggests traders don't believe the physical supply chain is genuinely tight. If physical metal were truly scarce, spreads would almost certainly have moved into backwardation, regardless of technical factors or market positioning.
The Critical Question of Surplus Availability
The zinc market and low LME stocks is currently wrestling with two critical questions: How much of the calculated surplus is actually available for LME delivery? And perhaps more importantly, how quickly can surplus material reach LME delivery points if needed?
While the global market may be in technical surplus, regional imbalances and logistical constraints could still create temporary tightness in specific locations. China has exported only 12,700 tons of refined zinc in the first half of 2025, suggesting Chinese production increases are largely staying within the domestic market rather than easing international supply constraints.
Short-position holders are essentially betting that surplus material will appear in LME warehouses before physical tightness forces them to cover their positions at higher prices. The relative calm in spread markets suggests most traders believe this gamble will pay off. However, the global trade impact of ongoing tensions between major economies adds another layer of complexity.
What Does This Mean for Zinc Market Participants?
Implications for Traders and Investors
For market participants, the current situation requires careful navigation. Low LME stocks are currently not a reliable indicator of physical market tightness, but this could change if regional supply chain gaps persist or widen.
Spread dynamics suggest watching Chinese export patterns will be crucial for determining market direction. If Chinese exports remain minimal despite growing production, Western market tightness could eventually translate into price action.
The improving trend in treatment charges indicates better concentrate availability, which should eventually flow through to refined metal production. However, the timeline for this process can be extended, creating potential windows of opportunity for traders who correctly anticipate regional imbalances.
While construction sector demand remains subdued, any unexpected improvement in this key consumption driver could rapidly shift market fundamentals, especially given the minimal inventory buffers currently available. Additionally, energy transition insights reveal that zinc may play a role in emerging battery technologies.
Balancing Supply and Demand Factors
Global mine production recovery is gradually flowing through the processing chain, with new projects like Kipushi and Ozernoye adding to concentrate availability. However, Western smelter disruptions continue to create regional supply chain gaps that are only partially offset by Chinese production increases.
The critical factor preventing a price response to low inventories appears to be demand weakness, which is offsetting production disruptions in Western markets. Construction activity—particularly in China—remains the key variable to watch, as any significant uptick could quickly transform market sentiment.
Singapore stock movements continue to provide insight into physical market flows, though their reliability as a market signal has diminished due to the financial incentives driving inventory churn.
FAQs About the Zinc Market and LME Stocks
Why are zinc prices falling despite record-low LME inventories?
The market is looking beyond current low stocks to anticipated surpluses. Zinc demand remains weak due to global construction slowdowns, while Chinese production is increasing. Traders believe the physical market is adequately supplied despite low exchange inventories, as evidenced by the contango in time-spreads rather than the backwardation typically associated with physical scarcity.
What role does Singapore play in the zinc market?
Singapore has become a key LME delivery point for zinc, with significant inventory churn since late 2023. The location has seen traders engage in warehouse arbitrage, with metal moving in and out based on financial incentives rather than physical market needs. In 2024 alone, over 691,500 tons of zinc moved through Singapore LME warehouses, creating a distorted picture of true market conditions.
How are Chinese zinc smelters performing compared to Western operations?
Chinese zinc output is growing steadily (4% year-over-year through July 2025), while Western smelters face disruptions. Plants in Japan, South Korea, Australia and Italy have reduced or halted production, creating regional supply gaps that LME stocks have helped fill. However, Chinese production increases have largely remained within the domestic market, with exports of just 12,700 tons in the first half of 2025.
What factors would indicate a genuine tightness in the zinc market?
A shift from contango to backwardation in LME spreads, rising physical premiums, increased Chinese exports, and sustained price increases would signal genuine market tightness. Currently, these indicators suggest the market remains adequately supplied despite low LME inventories. Traders should watch for changes in spread dynamics or accelerating stock drawdowns as potential early warning signs of tightening conditions.
Struggling to Stay Ahead of Zinc Market Fluctuations?
Discover how to anticipate market shifts before they happen with Discovery Alert's proprietary Discovery IQ model, delivering real-time insights on significant ASX mining opportunities across all commodities. Visit our dedicated discoveries page to understand why major mineral discoveries can lead to exceptional returns and position yourself ahead of the market.
