SMM News on July 30:
By July 28, LME zinc inventory (including non-registered warrants) had fallen to 101,800 mt, a cumulative decline of about 20,000 mt from mid-June. Against the backdrop of continuous destocking in overseas inventories, the LME zinc market structure shifted from contango to backwardation, and the backwardation structure kept widening. On July 28, the LME zinc Cash-3M spread had strengthened to $61.09/mt. In stark contrast, China’s zinc consumption remained in the traditional off-season. The social inventory of zinc ingot across seven regions in China as compiled by SMM continued to stay high at around 260,000 mt. The supply-demand patterns in China and abroad diverged markedly, and the SHFE/LME zinc price ratio weakened all the way down. Against this backdrop, the long-dormant Chinese zinc ingot export window reappeared, and market discussions on the reverse arbitrage of ‘buy SHFE zinc, sell LME zinc’ heated up significantly.
Overseas zinc ingot supply-demand remained persistently tight, and the SHFE/LME zinc price ratio deteriorated further.
Since July 2025, China’s zinc ingot import window has remained closed. Customs data showed that China’s cumulative net imports of refined zinc in full-year 2025 were 210,000 mt, down 51% YoY, with the net import volume narrowing significantly.
Entering 2026, according to SMM calculations, although domestic zinc concentrate TCs continued to decline to new historical lows, supported by high sulphuric acid prices and profits from other minor metals, domestic smelters did not enter a general loss-making stage until June. Overall, domestic smelters showed strong production enthusiasm in H1. Moreover, end-use consumption recovery in H1 was weaker than expected. Particularly after entering Q2, the downstream entered the traditional consumption off-season, with orders from galvanizing, die-casting and other industries weakening. Meanwhile, domestic smelters mainly conducted routine maintenance, leading to a limited decline in refined zinc supply. Under stable supply and weak demand, the social inventory of zinc ingot in China as compiled by SMM consistently remained at around 260,000 mt, with the destocking process markedly slower than in markets outside China.
In contrast, overseas zinc market supply was subject to persistent disruptions. Since the beginning of this year, smelters such as Kazzinc, Cajamarquilla, and YP experienced production disruptions one after another. Coupled with equally tight supply of overseas zinc concentrates, this imposed certain constraints on overseas refined zinc production. Since June, LME zinc inventory had been declining continuously, and tightening spot supply drove the rapid strengthening of the Cash-3M spread, while overseas spot premiums kept rising.
Amid the tight overseas and weak domestic market pattern, the SHFE/LME zinc price ratio had been continuously pulling back since 2026. As of July 28, the average spot price of SMM 0# zinc was 24,670 yuan/mt, and the SHFE/LME zinc price ratio had fallen to about 6.8. The theoretical import loss for Chinese refined zinc widened to about 4,600 yuan/mt.
The reverse arbitrage logic was gradually being realized: the export window had opened, and the LME delivery window was near.
From the perspective of arbitrage trading, the profit of a reverse arbitrage position came from the weakening of the SHFE/LME zinc price ratio, while the physical export and delivery to warehouse served as the ultimate realization path to convert paper profits into spot trade profits. Therefore, the opening of the export window and the turning positive of profits from shipping to delivery warehouse are key to forming a closed loop for this round of reverse arbitrage logic.
According to SMM calculations, as of July 28, the theoretical profit for exporting Chinese zinc ingot to the Southeast Asian spot market was about 300 yuan/mt; the spot export window had already opened, and the first realization path of the reverse arbitrage had been cleared. At the same time, driven by the continuous expansion of the LME backwardation structure, the theoretical profit from shipping Chinese zinc ingot to LME warehouses in Southeast Asia for delivery has also approached break-even—under the backwardation structure, spot and near-month prices are relatively firm; after shipping to delivery warehouse, gains can be realized in the near month with higher premiums, and the delivery window is entering the threshold of opening. It is worth noting that this is the third time in nearly two decades that the export window for Chinese zinc ingot has opened in a phased manner, a rare opportunity that has significantly heightened market attention.
From market feedback, since July, some domestic suppliers have actively started seeking export opportunities. Currently, exports mainly flow to the Southeast Asian spot market, while the actual export volume remains relatively limited. However, if the LME backwardation structure further expands and the SHFE/LME zinc price ratio continues to weaken, the profitability of shipping Chinese zinc ingot to LME warehouses for delivery could further expand. Driven by profits, the physical export volume corresponding to the reverse arbitrage is expected to grow significantly, while the rebalancing of domestic and external markets will in turn constrain the downside room of the price ratio.
Of course, the reverse arbitrage strategy is not without risk. If inventories outside China rebound from low levels, the backwardation structure narrows, or domestic consumption recovers beyond expectations, driving a relative strengthening of SHFE zinc, the SHFE/LME price ratio could see a repair, and reverse arbitrage positions would face pullback pressure. Additionally, factors such as exchange rate fluctuations, the logistics cycle for exports, and the scope of LME delivery brands will also affect the final realization of physical export profits—relevant variables require ongoing monitoring.
Market Outlook
Looking ahead to H2 this year, China's zinc consumption is expected to remain difficult to significantly improve. Meanwhile, markets outside China, against the backdrop of ore supply tightness and consumption growth in some regions, are likely to see the continuation of a tight spot supply pattern. SMM expects that in H2, the SHFE/LME zinc price ratio will continue to trade at low levels, the spot export window for Chinese zinc ingot is likely to remain open in phases, and under the reverse arbitrage logic, the ramp-up of physical exports will drive growth in Chinese zinc ingot exports in H2. SMM will continue to monitor the subsequent trends in the SHFE/LME price ratio, changes in the LME structure, and the actual realization of export profits.
(The above information is based on market data collection and comprehensive assessment by the SMM research team. The information provided in this article is for reference only. It does not constitute direct investment, research, or decision-making advice. Clients should make prudent decisions and not use this as a substitute for their own independent judgment. Any decisions made by clients are not related to SMM.)
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