LONDON - Another year of mine underperformance, record-low smelter treatment terms and a scramble for metal on the London Metal Exchange (LME). If you're thinking this is a description of the copper market, think again.

Copper may be facing a future structural supply shortfall but zinc is being squeezed in the here and now.

LME three-month zinc hit a new four-year high of $3 990 per  ton on Monday.

LME stocks have remained low all year. Registered inventory stands at 100 525 tons, but almost a third of it is in the form of cancelled warrants awaiting physical load-out.

Time-spreads are correspondingly stressed. The cash premium over three-month metal flexed out to over $230 per ton last week. It's eased a little, but at $139 per ton still signals acute tightness.

None of this was expected.

Nor was a sharp drop in global mine output in the first half of this year.

A shortage of raw materials is underpinning zinc's surprise rally, and if it continues, the current LME squeeze risks morphing into a structural supply problem for Western buyers.

SHORT-LIVED RECOVERY

The world's zinc mines lifted output by 4.8% last year, breaking a three-year streak of falling production.

When the International Lead and Zinc Study Group (ILZSG) met in April, it expected some of that momentum to carry into this year, albeit at a slower 0.3% growth rate.

The reality is that output shrank by 2.6% year-on-year in the first half of 2026, according to the Group's latest assessment.

Big mines, such as Antamina in Peru and Red Dog in Alaska, have seen output drop as they work their way through lower-grade parts of their ore-bodies.

Others have taken unexpected hits. Both 29Metals' Golden Grove mine in Australia and Boliden's Garpenberg mine in Sweden have had to change mine plans after seismic events in September 2025 and March this year, respectively.

Last year's bounce in mined output is starting to look like a blip in a broader downtrend.

Global mine production fell by 8.6% between 2015 and 2025, according to ILZSG data. Smelter output, by contrast, was broadly unchanged over the same period.

The mismatch between mine output and smelter capacity is widening again, generating intense smelter competition for concentrates.

PROFIT IMPLOSION

The result is an implosion in the treatment terms charged by smelters for converting concentrates to refined metal.

Shanghai Metals Market's (SMM) assessment of spot terms for zinc concentrate imports fell to minus $113 per ton last month, an all-time low.

Smelters are increasingly relying on by-products such as silver and sulphuric acid to offset the loss of what should be a core revenue driver.

Some will be lucky enough to have secured annual supplies at this year's benchmark terms of $85 per ton. That's still a very low number by any historical yardstick, and it may fall further if the spot market doesn't recover by the time next year's contract talks get underway.

Even Chinese smelters are struggling with margin compression, but they are still doing better than their Western counterparts.

Chinese imports of zinc concentrate surged by 30% year-on-year in 2025 as smelters used the looser concentrates market to stock up.

Imports were up again by 5% in the first seven months of 2026, suggesting China grabbed a larger share of available volumes in a tightening market.

China's national output of refined zinc rose by 5.9% year-on-year in the first half of 2026, according to ILZSG. Production in the rest of the world contracted by 3.4%.

STRUCTURAL TIGHTNESS

True, Western smelters have also suffered a series of unexpected knocks, including a fire at Kazakhstan's largest zinc facility.

But margin compression due to low processing fees poses a structural challenge, particularly if it's accompanied by higher power costs.

The Australian government has already stepped in with a financial aid package for Trafigura's Hobart zinc smelter in Tasmania.

The transitional funding buys time for the company to progress studies into modernising the facility with one eye on potential co-products such as germanium and indium.

The broader problem, articulated by Trafigura CEO Richard Holtum in a May blog about the perilous state of European smelters, is that "markets alone will not solve this".

The current market dynamic of constrained concentrates availability and bombed-out treatment terms will only exacerbate the West's zinc smelting challenge.

The LME squeeze reflects the divergent fortunes of Western and Chinese smelters. The London market is short of refined zinc. China has plenty but is at the moment only drip-feeding metal into LME warehouses, enough to alleviate but not end the tightness.

Unless mined supply and smelter profitability improve, this could be a harbinger of things to come — a Western market that is increasingly dependent on China to balance its structural deficit.