By Stuart Burns
The lead market is not one that gets a lot of coverage, possibly because such a large proportion of demand comes from the battery sector that unless there is a cataclysmic disruption to the supply market, the story of lead is the story of the battery market.
But a recent article by Reuters’ Andy Home examines the supply market and inventory levels to throw some light on the underlying trends and seeks to better understand future lead price trends.
First and foremost, the lead market appears in deficit, according to The International Lead and Zinc Study Group (ILZSG), which estimates the global refined lead market to have been in a 40,000-metric-ton deficit in the first half of this year. The World Bureau of Metal Statistics is even more pessimistic, putting the deficit for January to June 2013 at 185,900 metric tons.
LME-registered stocks have fallen by 132,000 tons, or almost 42%, since the start of January and are now standing at 185,675 tonnes, a three-year low. Meanwhile, visible stocks in China have been falling, too. Reuters tells us registered inventory on the Shanghai Futures Exchange (SHFE) stands at 100,013 tons, the lowest level since January.
The situation seems clear, then – market in deficit, inventory falling – and that explains lead’s strong price performance relative to the other base metals.
Well, not quite, it seems.
The northern hemisphere had a cold and prolonged winter, boosting demand for lead to rebuild battery makers’ inventories. After high demand from January to March, the deficit shrank to just 5,400 tons over the months of May and June, a trend the paper expects continued through the summer. Nor, for once, was the demand all coming from China.
In fact, China showed a surplus of 44,000 tons over the first half compared to a deficit in the rest of the world of 83,000 tons, according to quoted ILZSG figures. Supporting this, China actually exported 10,000 tons over the period in spite of a hefty export duty, suggesting the country really does have a surplus of metal.
LME Lead Warehouse Stocks
However, analysis of the LME inventory’s canceled warrants suggests maybe a proportion of the metal leaving LME warehouses is merely being moved out of bottlenecked LME warehouses. The majority is held at Antwerp, Vlissingen, Johor and Detroit – notorious for delayed delivery problems. In reality, this metal may not be drawn down for consumption as much as removed to be warehoused elsewhere.
In the same way, price movements (at least spot prices rising above one-month prices, said to be in backwardation) for periods of time have more to do with dominant warrant holders manipulating supply than with true tightness in the physical market.
Lead is likely to remain one of the few metals in deficit, even if the deficit is not as pronounced as the headlines suggest. With its co-mined partner zinc in surplus, mine expansion unlikely and subject to the severity of the coming winter in the northern hemisphere, an ongoing deficit, and support for prices, is most likely.