The Chinese smelters that churn out more than 40% of the world’s zinc may cut production for the first time in four years because they can’t get enough raw material, further lifting prices of one of this year’s strongest-performing commodities.
Zinc, used for rustproofing steel in everything from auto bodies to suspension bridges, has surged as much as 25% in 2016 to the highest since July as miners supply less of the ore concentrate that’s refined to produce the metal, just as demand rebounds in China, the biggest user. 
Banks from Goldman Sachs Group to Macquarie Group see further gains, while Glencore, the biggest miner of the metal, says structural deficits are back.
The zinc market is feeling the effects of last year’s 26% collapse in prices that prompted miners including Glencore to trim output and, in some cases, shut down production altogether. 
Macquarie estimates that supplies of concentrate will shrink 8% this year with consultant CRU Group forecasting the biggest shortage on record. Smelters will need to compete to secure the dwindling supply of concentrate by reducing the fees they charge miners to turn it into zinc, and that may prompt some to curb refining, according to SMM Information & Technology Co.
“Most smelters won’t be able to hold production levels now if processing fees shrink further,” said Liu Weijie, an analyst at Shanghai-based consultant SMM.
Production of refined zinc in China is set to drop about 6% in 2016 from a year earlier to 5.65mn metric tonnes amid the biggest shortage in supply of mined concentrate on record, according to Dina Yu, a Beijing-based analyst with CRU Group. The deficit will be 910,000 tonnes, in terms of metal contained in the ore, pushing domestic smelting fees to the lowest in almost two years, data from SMM Information & Technology show.
Spot fees for domestic mine output declined to 5,200 yuan ($790) a tonne of contained metal in May, the lowest since July 2014, SMM data show. Charges for imported ore have dropped to the lowest since 2012, according to the CRU’s Yu.
Smelters are also being squeezed from outside China. Purchases of foreign concentrate shrank to the lowest since 2014 in April and are down 17% in the first four months from a year earlier, according to customs. 
“Foreign miners are prioritising supplies to their own refiners, leading to a big drop in shipments to China,” said SMM’s Liu. By contrast, refined-zinc imports jumped 65% in the first four months from a year earlier, customs data show.
The strongest acceleration in China’s infrastructure spending since the global financial crisis and a bottoming in the property market will drive demand, according to Goldman Sachs. 
A quarter of the metal’s consumption in China comes from infrastructure and a significant amount from commercial and residential property uses, the bank estimated in a May 19 report. Zinc inventories in warehouses tracked by the London Metal Exchange have shrunk about 38% since September.
Zinc has “by far the most bullish supply side dynamic across the base metals,” Goldman Sachs said last month, forecasting the global shortage of refined supply will balloon to 360,000 tons next year from 114,000 tons in 2016. 
Macquarie predicts an average of $2,313 a tonne in 2017, while Glencore sees continuing supply challenges because of scarcity at current prices.
Zinc for delivery in three months climbed above $2,000 for the first time in more than 10 months on Thursday, before trading at $1,985 in London for a gain of 4.6% last week. The metal’s return this year makes it the fourth-strongest raw material on the Bloomberg Commodity Index.
Some are not so bullish. It may take longer than expected for the emerging concentrates supply crunch to feed through to refined-metal markets, analysts from Citigroup including David Wilson said in an e-mailed note. 
Zinc demand has remained muted, and total inventory including metal that’s held off- exchange may amount to between 2.5mn tonnes and 3.5mn tonnes, or as much as 13 weeks consumption, according to the bank. This is “likely to have a dampening effect on prices,” the analysts wrote.
The raw material shortage may mean Chinese smelters fulfil part of a pledge they made in November to cut output by 500,000 tonnes in 2016 from about 6mn tonnes last year. 
That would reverse an increase of 1% in the first four months, according to Goldman Sachs estimates.
An official at China’s biggest zinc processor, Zhuzhou Smelter Group Co, who asked not to be identified, was unable to comment immediately because the company was still assessing output. A decline in production would be the first since 2012, statistics bureau data show.