Zinc prices rose on Thursday to their highest in nearly 10 months as a flurry of buying based on expectations of tight supplies fuelled upward momentum, but analysts expect optimism to fade as demand weakens. Benchmark zinc on the London Metal Exchange ended up 0.6 percent at $1,982 a tonne. Earlier on Thursday the metal used to galvanise steel hit $2,004, its highest since July 23.
Zinc has outperformed other industrial metals so far this year due to forecasts of shortages after mine closures. It is up about 4 percent so far this week and 23 percent this year,
"I buy into the structural story around zinc, but I'd be surprised if it manages to keep up this momentum over the next few months," said Dan Smith, a senior commodities analyst at Oxford Economics.
"People are flagging up tightness ahead, but look at steel, it doesn't inspire confidence in zinc demand and in terms of the wider context for commodities the dollar will get stronger in the next few months."
Shanghai steel futures dropped to near three-month lows on Thursday amid expectations of slower seasonal demand in top consumer China, where there is a surplus.
Perceptions the US Federal Reserve may raise rates over coming weeks have boosted the dollar this month. A higher US currency makes dollar-denominated commodities more expensive for non US-firms.
Analysts say until inventories start to fall, zinc's price gains are unlikely to be sustainable.
"Market estimates for total metal inventory overhang range between 2.5-3.5 million tonnes, equivalent to 9-13 weeks of consumption, a volume likely in our view to have a dampening effect on prices," Citi analyst David Wilson said. A tight concentrate market as seen in falling treatment charges, around $125 a tonne now from $205 a tonne last September, will eventually feed into the metal market.
"People looking at the treatment charges are expecting a dramatic tightening, but there is a lot of metal overhang and higher prices could see the reactivation of some projects that were put on ice and cutbacks reversed," Wilson said.
Traders say some of the fund buying in recent days has been due to a break of key technical levels such as the 100- and 200-day moving averages at $1,980-$1,990 and that there is strong Fibonacci resistance around $2,040.
Three-month copper closed down 0.2 percent at $4,608 a tonne and aluminium slid 1.9 percent to $1,540.
Lead climbed 0.4 percent at $1,716.5, tin gained 0.5 percent to $16,275 and nickel slipped 0.1 percent to $8,470.
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