Zinc Market Faces Heightened Volatility as Supply Tightens and Inventory Declines

Zinc’s recent performance underscores the growing volatility in the market, driven by tightening supply and fluctuating availability. The metal, which is primarily used to galvanize steel, experienced significant price movements last week, ultimately finishing nearly 5% higher despite a 2.5% decline on Thursday. This rollercoaster ride was largely driven by substantial withdrawals from LME warehouses, sparking speculation about a potential squeeze on short-position holders and further amplifying concerns over market stability.

According to media reports increasingly forecasting that tight supply conditions for zinc will persist into 2025, which could lead to more frequent and sharper price fluctuations in the near future. The possibility of production cuts by either miners or smelters could further strain supply, serving as a catalyst for more short-term price spikes

As of Monday, zinc had dropped nearly 0.4%, largely influenced by a stronger U.S. dollar, which has put downward pressure on many commodities. However, despite the recent downturn, zinc has still seen an overall gain of around 16% this year, making it the best-performing metal among the six base metals on the LME.

The dynamics within the zinc market are increasingly like those of copper, another key industrial metal, where smelters in China are grappling with poor profitability following rapid capacity expansions. This expansion has left smelters in intense competition for raw materials, raising the stakes in ongoing negotiations over annual ore supply contracts. One notable example is the ongoing talks between Chinese copper smelters and Chilean mining giant Antofagasta Plc. The slow pace of these discussions—alongside expectations of a significant drop in processing fees—could further exacerbate smelters’ financial difficulties, potentially affecting output levels in both the copper and zinc sectors.

The situation in the zinc market is also influenced by ongoing disruptions at major mining operations, such as Ivanhoe Mines Ltd.’s Kipushi mine in the Democratic Republic of Congo. Production downgrades at these and other mines have contributed to the tightening of global zinc supplies, despite relatively subdued demand from China, where the steel and property sectors are facing downturns.

In addition to the LME developments, inventory levels on the Shanghai Futures Exchange have also seen significant declines. Last week, zinc stocks fell by more than 9,000 tons—the largest weekly drop in almost a year. This sharp decline further illustrates the pressures on zinc supply chains and raises concerns about future availability.

With ongoing supply shortages, zinc prices are expected to remain volatile in the short term. Traders are closely watching whether the zinc withdrawn from LME warehouses last week will eventually be re-registered as stockpiles or diverted to consumers directly. The market’s uncertainty suggests that zinc will remain a focal point for both traders and investors, as supply chain disruptions and fluctuating inventories continue to drive price swings.

As the zinc market enters 2025, industry stakeholders will need to adapt to a potentially more turbulent period, marked by continued supply constraints, production challenges, and unpredictable price movements.