The first half of 2026 saw the LME base metals market navigate a volatile path defined by high volatility, rapid shifts, and structural divergence, largely driven by intense geopolitical fluctuations. The war in Iran that erupted in late February became the central variable shaping the period, with the fluctuating passage status of the Strait of Hormuz leading to the repeated re-pricing of risk premiums for energy and metal supply chains. In this context, the zinc market did not experience an independent bull run like aluminum, which benefited from Middle Eastern production disruptions. Instead, zinc emerged as a neutral performer for the half-year, caught in a fierce tug-of-war between a larger-than-expected supply-demand deficit and macro pressures. The market is now entering a new phase of high noise and volatility, yet with clearer divergent logic, where the core conflict centers on the extreme pull between "rigid ore shortages" and the "weak reality of the off-season."
Ore Supply: Global Resource Tightness and Rigid Cost Support
During the first half, the narrative of tightening zinc ore supply gained further strength. Overseas mines faced frequent disruptions from strikes, declining ore grades, and earthquakes, leading to greater-than-expected reductions in output. Domestic mine additions were limited, and imports contracted due to falling treatment charges (TCs). The raw material squeeze has reached an extreme, with the average domestic zinc concentrate TC falling below the 1,000-yuan mark in June and plunging to -200 yuan per metal ton (as low as -700 yuan in some northern regions). Import TCs also remained deeply negative at around -70 USD per dry ton. Zinc's formal inclusion in China's "15th Five-Year Plan" strategic mineral catalog has further reinforced the rigid constraints on the ore supply side from a policy perspective.
Smelting Profits and Operating Rates: Tight Ore, Loose Metal, Rising Output Cut Expectations
Despite the extreme tightness in ore supply, the domestic refined zinc market exhibited a "tight ore, loose metal" dynamic. High sulfuric acid profits supported elevated smelter operating rates in H1. However, as TCs continued to fall and sulfuric acid prices retreated from highs, smelter losses exceeded 2,000 yuan per ton. Domestic refined zinc output in June fell 3.8% year-on-year, with raw material inventories dropping to around 18 days. Under the dual pressures of negative profits and scarce raw materials, expectations for substantial production cuts at smelters reliant on purchased ore are intensifying for the mid-to-late third quarter.
Inventory Structure: High Domestically, Low Overseas, Significant Regional Mismatch
In the first half, domestic social inventories accumulated significantly to multi-year highs, with the pressure from visible stocks imposing a tangible ceiling on prices. Conversely, LME zinc inventories remained persistently low, providing a floor for zinc prices. Influenced by the SHFE/LME price ratio falling to a near-decade low (around 6.8), China's refined zinc imports from January to May plummeted over 65% year-on-year. If domestic smelter cuts materialize, monthly net exports could emerge to alleviate the mismatch of "domestic surplus and overseas tightness."
Downstream Sectoral Demand: Traditional Off-Season Chill, Structural Bright Spots Fail to Mask Weakness
June coincided with the traditional consumption off-season, where high temperatures and rainy weather hampered outdoor construction. New housing starts fell 22.6% year-on-year, while property development investment dropped 16.2%, continuing to drag on demand for galvanized pipes. However, power and computing infrastructure became key supports, with ultra-high voltage projects and data center construction maintaining high operating rates. Additionally, galvanized sheet exports in May surged 8.36% year-on-year, showing a positive role for external demand in offsetting domestic softness. Overall, full-year domestic consumption is expected to be flat or slightly down, with limited demand elasticity.
Macro Influences: Hawkish Pressure and Geopolitical Risks Intertwined
On the macro front, market pricing logic underwent a sharp reversal from "rate cut expectations" to "rate hike fears." The new Federal Reserve Chair established a hawkish tone, making a rate hike within the year highly probable. This pushed the US Dollar Index firmly above 101, creating systemic valuation pressure on zinc prices. Concurrently, fluctuating US-Iran tensions and heightened geopolitical risks in South America exacerbated supply chain shocks and short-term volatility.
Key Forward-Looking Indicators and Outlook
Looking ahead to the second half, supportive factors for zinc prices include the sustained global zinc ore shortage, output cut expectations triggered by smelting profits nearing breakeven, and overseas supply tightness due to regional mismatches. Downside pressures stem from a lack of significant bright spots in terminal demand, global visible inventories at high levels, and the dual constraints of potential rate hikes on both liquidity and demand suppression. In a neutral scenario, zinc supply and demand are expected to maintain a tight balance, with the Shanghai zinc price range projected between 21,500 and 25,000 yuan per ton. The subsequent market direction will primarily depend on: 1. The scale of realized domestic smelter cuts in Q3; 2. The volume of domestic zinc metal exports and the accumulation of LME inventories; 3. The potential shift in Fed monetary policy and whether the Middle East situation can truly stabilize.
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