SINGAPORE, June 28 --The recent recovery in zinc prices on the London Metal Exchange could turn out to be a false dawn, as despite some encouraging indicators from the physical market, there's little clear evidence that fundamentals are genuinely bullish, Macquarie Bank said.

LME three-month zinc prices have rallied 19% from their 2010 low of $1,577 a metric ton on June 7, as inventories in Shanghai have fallen and physical premiums in the U.S. have risen.

However, the drop in Shanghai Futures Exchange inventories from 295,000 tons to 265,000 tons isn't evidence of any fundamental change in the market, Macquarie said.

The doubling in U.S. premiums to around 4.5 cents a pound since the start of the year is because much inventory is tied up in financing deals, making the cash market artificially tight, it said.

"Falling stocks and rising premiums may appear positive but, in our opinion, misrepresent the current balance in a zinc market that remains heavily oversupplied and is still carrying reported stocks that are at a 15-year high."

Macquarie said that if physical tightness was emerging, they would have expected to see a narrowing of spreads on the LME rather than the persistent contango that has supported the financing deals.

Financing deals work as long as the market stays in contango, with players taking physical long positions using borrowed money, while selling out in the futures curve, pocketing the profit from the higher futures price after paying associated interest and storage costs.

Macquarie said that while demand has recovered since the global financial crisis, supply has too.

"World zinc output has been running at record levels in recent months. It is for this reason that the zinc price has underperformed the broader base metals complex this year and, in our opinion, it will be many months before the market is anywhere near balance."

The global refined zinc market was in a surplus of 180,000 tons in the first four months of this year, the International Lead and Zinc Study Group said in a June 16 report.

At 0230 GMT, LME three-month zinc was trading at $1,885/ton, up $13 since Friday's kerb.