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LONDON (Reuters) - The refined zinc market looks super tight.

London Metal Exchange zinc spreads are stressed, with the cash-to-three-months premium hitting a one-year high of $63 per ton earlier this week.

LME stocks are low, at just 99,900 tonnes excluding metal earmarked for physical load-out.

It’s the same story in Shanghai.

Shanghai Futures Exchange (ShFE) zinc spreads are also in backwardation, while the premium for metal in bonded warehouses shot to multi-year highs in September.

ShFE stocks have rebuilt slightly since the start of the month to 53,500 tonnes. But that’s still well short of the 160,000 tonnes that were there as recently as April.

“Screamingly bullish” is how analysts at Citi described the Shanghai market earlier this month. (“Zinc’s screaming”, Oct. 5, 2018).

Not the sort of headline you’d expect in a market that is weighed down by expectations of a looming supply surge.

Feast, however, has been postponed, leaving the physical supply chain hungry for units.

ILZSG MOVES THE GOAL-POSTS

The International Lead and Zinc Study Group (ILZSG) made some interesting revisions to its supply-demand forecasts in its October assessment of the zinc market.

The group increased its expected global supply deficit this year to 322,000 tonnes from the 263,000 tonnes forecast at its last meeting in April.

Trying to predict a market balance for an industrial metal such as zinc is a hapless exercise, particularly given the statistical opacity of China, the largest single influence on the calculations.

The deficit assessment is a function of many moveable inputs, some of them known, some of them “known unknowns”.

The real takeaway is not the outright size of deficit but why the group has increased its shortfall estimate.

This year’s expected mine production growth has been slashed to 2.0 percent from April’s forecast of 5.1 percent.

China’s own mine output is now forecast to contract by 2.5 percent this year. In April the ILZSG expected it to rise by 2.3 percent.

China’s usual “swing capacity”, the smaller operations that burst into life during periods of elevated pricing, has failed to swing this time around, even though the zinc price hit 11-year highs in the second quarter.

Environmental crackdown seems the most plausible explanation for the change in Chinese supply dynamics.

Outside of China, meanwhile, the wave of new mines is only starting to build.

That supply will hit the market next year, when the ILZSG is forecasting global mine production to surge by 6.4 percent with refined output growth accelerating from 1.4 percent to 3.0 percent.

Note, however, that the group is still expecting a small 72,000-tonne refined metal deficit next year, presumably allowing for the time it takes for higher mine output to travel down the production chain.

The supply surge, in other words, has been pushed back to 2019.

Physical tightness in the refined segment of the market, it seems, is not going to go away any time soon, either in Shanghai or in London.

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