Benchmark zinc ended down 1.5 percent at $3,335 a tonne from an earlier $3,400, its highest since August 2007. Zinc gained more than 28 percent last year after climbing 60 percent in 2016. "Prices will stay elevated because we have a market deficit that requires inventory drawdown," said Societe Generale analyst Robin Bhar, adding that new supply from some smaller mines in Canada and Australia would not be enough to balance the market.
"New supply and demand destruction due to zinc substitution will eventually rebalance the market, but that could take months, if not years." Societe Generale expects the zinc market deficit at 350,000 tonnes last year and this year after a deficit of 200,000 in 2016. It sees world refined metal production to rise to 14 million tonnes this year from 13.80 million in 2017.
China accounts for nearly half of global zinc demand. The country's war on smog cut local output of zinc last year and is expected to cut supplies again this year. China's zinc imports jumped to above 573,000 tonnes in the first 11 months of last year, up 43 percent from the same period of the previous year.
Shortages have led to a drawdown of inventories in LME-approved warehouses, which at 180,250 tonnes are down more than 30 percent since last October. Stocks in warehouses monitored by the Shanghai Futures Exchange at 77,383 tonnes are down 60 percent since March last year.
Worries about a tight LME market have been reinforced by two large positions holding between 30 and 39 percent of zinc warrants and cash contracts. Jitters about a shortfall on the LME market has since December 27 seen the cash contract trade at a premium over the three-month contract.
The premium was trading around $15 a tonne on Tuesday. Copper, aluminium, lead and nickel all ended 2017 higher by around 30 percent on expectations of market deficits and falling inventories this year. Analysts expect another year of higher prices. Copper was down 0.3 percent at $7,101, aluminium slid 1 percent to $2,152.5, lead fell 2.3 percent to $2,545, tin lost 0.3 percent to $19,950 and nickel gained 1.3 percent to $12,695.