Singapore 23/08/2016 - SHFE zinc is due a near-term correction, analysts believe, after surging around 50 percent since November last year.
But most remain positive about the metal's supply-demand fundamentals, which they see lifting its price subsequently, they said.
Market observers had warned as early as June that SHFE zinc was becoming overheated but the metal has continued to climb, hitting a five-year high of 17,835 yuan earlier this month.
After trending slightly lower in mid-August, it has since headed upward again - the most active October zinc contract closed at 17,565 yuan on Tuesday, up 180 yuan on Monday's close.
"There is a need for a correction in the near-term for SHFE zinc, but given its good fundamentals, there is also a basis for a rebound," Xiamen-based Ruida Futures said on Tuesday.
Market participants generally remain positive on the outlook for the metal - concentrate supply, which is already tight in the global market, is expected to tighten further over the rest of the year following major zinc mine closures and Glencore's production cuts.
Any upside for zinc prices depend on Glencore's willingness to bring back online some of its mine supply and China's steel production rate, Morgan Stanley said in a report on Monday.
With the removal of one million tonnes per year of mine supply in recent years and new environmental policy constraints on China's own zinc miners, Glencore now controls the market's largest dormant mine supply capability - the cut of 500,000 tonnes per year it announced in October last year equates to four percent of global mine supply, Morgan Stanley noted.
But market participants do not anticipate an announcement from Glencore soon announcing a restart and, even if it does, the concentrate market will remain tight in the near term given the lead time required to fire back up shuttered mining operations, they noted.
Zinc continues to see support from the low probability of Glencore restarting idled production in the near term, China's Galaxy Resources said on Tuesday.
And even if Glencore were to decide to restart production, there will be no change to the fact that zinc concentrate demand exceeds supply in the domestic market, the Beijing-based futures brokerage added.
In addition, Chinese domestic zinc concentrate supply is also expected to stay tight, analysts said.
"By rights, with zinc prices rising, domestic miners should be lifting production. But due to environmental checks and tightness in funds, the production ramp-up among domestic miners has not been strong," a Shanghai-based zinc analyst told FastMarkets.
Last week, all zinc and lead mines in Huayuan County in Hunan in southern China were ordered to halt production till June 2017 for safety inspections.
SUPPORT FROM DEMAND
With the peak demand period of September-October approaching, support for lead is likely to grow over the next few weeks, China's Jinyuan Futures said.
"There is more room for an increase [in SHFE zinc]. Our target is 18,000 yuan," the broker said on Monday.
Local Chinese steel galvanisers, which take more than 60 percent of total zinc supply, have boosted metal imports to offset the lack of concentrates, Morgan Stanley said.
"But this is clearly not enough," it added, noting the 45-percent surge in global zinc prices, the 10-percent decline in global exchange inventories since the first quarter and the 40-percent year-to-date collapse in spot treatment charges for imported concentrates.
The zinc price may be buoyed or lifted if China's steel production rate remains around 800 million tonnes per year into 2017, it estimated.
Tight ore supply has yet to result in similar tightness in the refined metal market but there are signs that metal supply is starting to tighten, the Shanghai analyst said.
"Chinese smelters' concentrate inventory levels are low and small producers are starting to worry about raw materials," she said. "No one has said they are shutting production due to ore shortages yet but I think smelters' operating rates will soon reflect the ore supply tightness."
Zinc stocks in the SHFE warehouse system fell 3,155 tonnes or 1.6 percent week-on-week to 194,144 tonnes as of August 19, making it the fourth straight week of decline.
Chinese refined zinc production fell 0.7 percent year-on-year to 3.53 million tonnes in January-July this year.
(Editing by Mark Shaw)