Zinc's premium over lead to extend decline after peak

* Zinc premium over lead hits highest in nearly 6 yrs in late Oct

* Lead may close some of price gap on winter battery demand

* Doubts emerge on scope of zinc supply/demand deficits

(Reuters) - Zinc's premium over sister metal lead is likely to continue to slip in coming months after hitting a multi-year peak as lead demand climbs during the seasonally strong winter and amid doubt over the scope of projected deficits in zinc.

Zinc's price gap over lead expanded to a high of $297 a tonne at the end of October, the strongest in nearly six years, after investors piled into the zinc market on bets that the closure of big mines would lead to deep deficits.

The rich premium of galvanising metal zinc represents a big reversal in the relationship between the two metals, which are often used as the basis for trading strategies, using either the spread or the ratio.

The premium, based on London Metal Exchange benchmark prices, has since pulled back to $226.

The extent to which investors have bought zinc and shunned lead is out of proportion to fundamentals, some analysts argue.

Both metals are typically found in the same mines so lead supplies should also be affected by mines shutting down.

"Lead is moving into structural deficit at least in tandem with zinc, and lead inventories are much lower," BNP Paribas analyst Stephen Briggs said in a note. "The discount to zinc may narrow."

Instead of a premium, a year ago zinc was at a discount to lead by about $200 with zinc weighed down by heavy surpluses.

One reason the lead price has underperformed this year is disappointing demand, partly due to weak sales of electric bicycles in China which use lead-acid batteries. Batteries account for 80 percent of global lead consumption.

That side of the equation is likely to improve in coming months since battery makers often see increased business in cold weather due to increased battery failures.

"Usually lead is seasonably stronger into the back end of the year as well as January and February, so maybe we can see some of that underperformance unwound," said Citi analyst David Wilson.

Temperatures in all 50 U.S. states hit freezing or below this week as unseasonably cold weather moved across the country.

Many bullish zinc investors base their views on big supply/demand deficits developing, but some analysts say any shortfalls may be less than expected, which could curb zinc's gains.

Analyst Jessica Fung at BMO Capital Markets pointed to two recent expansion announcements - by Vedanta Resources at a new mine in South Africa and Boliden at its Odda smelter in Norway.

"These projects...indicate there are opportunities to close the deficit gap in the next few years," she said in a note.