LONDON, Oct 9 (Reuters) – Zinc prices rose on Tuesday towards last week’s three-month high as falling stockpiles underlined a global supply shortage. Benchmark zinc on the London Metal Exchange (LME) traded up 1.8 percent at $2,662 a tonne after gaining as much as 3.2 percent earlier in the session.

The metal used to galvanise steel has surged by more than 16 percent from August’s 22-month low of $2,283 and is close to a $2,706.94 peak reached on Oct. 2.

But the rally is likely to be short-lived, said Capital Economics analyst Caroline Bain.

“The market does look a bit tighter currently, but over the next three months we see the supply picture improving,” she said, predicting prices at $2,300 at the end of next year.

STOCKS: Zinc inventories in LME-registered warehouses fell below 200,000 tonnes from more than 250,000 tonnes in August and are nearing 10-year lows.

Stockpiles in Shanghai Futures Exchange storehouses are at 29,204 tonnes, the lowest since 2007.

SPREAD: The premium of cash zinc over the three-month contract rose to $40, reversing recent falls and signalling a lack of nearby supply. MZN0-3

TECHNICALS: Zinc was struggling to break above its 100-day moving average at $2,685.

DEFICIT: Demand for refined zinc will exceed supply by 322,000 tonnes this year and 72,000 tonnes in 2019, the International Lead and Zinc Study Group (ILZSG) said on Monday.

CHINA OUTPUT: Production cutbacks at China’s zinc smelters in response to tighter environmental checks and weaker profits have tightened supply, said CRU analyst Dina Yu in Beijing.

China accounts for nearly half of global refined zinc production of about 13.5 million tonnes. It is also the largest consumer of the metal.

OUTLOOK: A mixture of rising mine output, reduced pressure on polluting Chinese industry to close during the winter period and a weakening of Chinese economic growth is likely to ease the supply situation, said Capital Economics analyst Bain.

CHINA GROWTH: The International Monetary Fund cut China’s 2019 growth forecast to 6.2 percent from 6.4 percent, leaving the 2018 forecast unchanged at 6.6 percent. Lower growth implies weaker demand for metals.

It also reduced its global economic growth forecasts for 2018 and 2019 to 3.7 percent from 3.9 percent for both years.

ALUMINIUM: LME aluminium traded 1.3 percent down at $2,040 a tonne, falling for a fourth day.

A supply scare involving a Norsk Hydro alumina smelter in Brazil appeared resolved, while consultancy CRU said tax rebates in China, the largest aluminum producer, heralded a surge in exports from the country.