Zinc stocks on the London Metal Exchange (LME) are rising, but the market is sending a seemingly contradictory signal: the price of zinc for immediate delivery is climbing further above the price for delivery in three months.
Prices on the LME have risen to US$4,013 ($5,635) per tonne, the highest since April 2022. The metal, primarily used to galvanise steel, has now risen for five consecutive months, taking its year-to-date gain to around 30%.
What backwardation signals
That gap between the price for immediate delivery, or spot price, and the price for delivery in three months is known as backwardation. This happens when buyers are paying more for a commodity now than they are for delivery in the future.
It often signals that supplies are tight or demand is unusually strong in the near term, even if the market expects conditions to improve in the foreseeable future.
Most of the time, commodity markets are in contango, which is when futures prices are higher than the current spot price.
Contango is the more common scenario because storing, insuring, and financing physical metal costs money. The organisations carrying those expenses can then generally make a future delivery more expensive than buying metal today.
Neither condition guarantees where prices will go next. But the shape of the futures curve can tell investors a lot about the balance between immediate supply and demand — and can affect returns for investors holding futures in that commodity.
In zinc’s case, the backwardation has widened, even as reported LME stocks have apparently increased, raising a key question: Why is the market still paying such a premium for the metal available now?
Stocks rising but squeeze tightening
LME official zinc stocks rose from around 86,500 tonnes on 17 August to 113,100 tonnes by 4 September — an increase of 26,600 tonnes, or almost 31%.
Yet over the same period, the LME cash-to-three-month backwardation — the gap between zinc prices for immediate delivery and delivery in three months — expanded from US$82.88 to US$168.62 a tonne.
That means the premium for immediate zinc has almost doubled, despite the apparent increase in inventories of the metal.
The explanation lies in what those stock figures actually represent.
LME inventories are divided into three categories:
- Registered warrants: metal available for delivery against an LME contract
- Cancelled warrants: metal earmarked for withdrawal, and therefore temporarily unavailable for delivery (Not cancelled orders as one may interpret from the term)
- Off-warrant metal: zinc held in LME-approved warehouses that has not yet been registered as exchange inventory
The official LME figure covers registered and cancelled warrants but, notably, excludes off-warrant metal.
Data from the Shanghai Metals Market (SMM) shows total zinc held across all three categories was 115,900 tonnes on 17 August. It rose to 126,900 tonnes on 18 August, then stood at 126,700 tonnes on 4 September.
In other words, the total amount of zinc held within the LME warehouse system barely changed over the period. Much of the apparent inventory build was a shift of existing metal from off-warrant storage into the official system, rather than a substantial increase in the amount of zinc available.
The supply picture is tighter still when looking at registered metal.
Registered warrants stood at 78,000 tonnes on 17 August, rose to 87,900 tonnes the following day, then eased to about 82,900 tonnes by 4 September.
Meanwhile, the cancellation ratio climbed to around 30% from 27 August. That means roughly three in every 10 tonnes of official stocks had been earmarked for withdrawal.
The distinction is important: zinc can appear in official inventory figures without being available to meet immediate demand.
The widening backwardation suggests that the market is placing a higher value on metal that can be delivered now, even as the headline stock figure rises.
What to watch next
For investors, the key signals to monitor are registered LME stocks, cancelled warrants, Chinese export arrivals, the cash-to-three-month spread, and the direction of global refined zinc production.
If Chinese exports arrive in meaningful volumes and become available for LME delivery, registered stocks could rise and the cash-to-three-month backwardation could narrow.
That would suggest the immediate squeeze is easing and the market is normalising, even if the total amount of zinc held in LME warehouses has not changed dramatically.
If arrivals disappoint, registered inventories remain tight, and the cancellation ratio stays elevated, the premium for immediate zinc could remain under pressure to rise.
The broader production outlook provides a potential source of relief, but the timing of physical deliveries is likely to matter more to the near-term spread.
Output declined in H1 2026, but SMM revealed earlier this month some new capacity in China had continued to ramp up.
As such, SMM expects global zinc concentrate production to increase by around 70,000 tonnes of contained zinc this year.
Write to Christina Wagstaff at Mining.com.au
Main image: iStock
