U.S. Lead Market Driven By Supply: Hybrid Pricing Model Coming?

 |  Includes: LD, LEDD
by: MetalMiner

By Stuart Burns

An intriguing article in Reuters recently examines the peculiarities of the U.S. lead market.

The closure last year of Doe Run’s Herculaneum Primary Lead smelter in Missouri not only brought to an end 120 years of lead smelting in the town of the same name, but also the end of the last primary lead smelter in the United States. Henceforth, all domestically produced lead will come from recycling and any primary metal (refined from ores) will have to be imported.

Traditionally, this has been from fellow NAFTA partners Canada and Mexico, the article says, but increasingly it may have to come from further abroad. The reason Herculaneum closed is because even after 10 years of working with the EPA, Doe Run has been unable to meet some of the most stringent ambient air quality standards in the world, a fate that may begin to have an impact on Canada’s refining industry over time.

More to the point, the closure of the U.S. facility has highlighted a situation that to industry insiders has been an issue for the last year or two, but which raises questions about how lead consumers will be priced in future and how lead processors will hedge their price risk.

Lead from battery recycling and lead from refined production are driven by a different set of dynamics.

The refined lead market price as expressed by the LME price is a reflection of sentiment, driven by supply and demand, in the global lead market. That sentiment will be influenced by supply constraints at mines, availability of refining capacity and demand in top consumers China and Europe. But the recycled battery market in the U.S. will be driven by scrap recovery in the U.S., the weather, domestic demand, scrap refining capacity, and other factors.

As this graph of the LME lead price versus a Platts-produced battery scrap reference price shows, the two can move in opposite directions to each other at times, making the LME price inappropriate for the majority of the U.S. market reliant on battery scrap as a supply source.

Click to enlarge

Source: Reuters

In addition, it raises the question: how do consumers and processors hedge their price risk in an environment without a futures market?

Possibly reflecting this, LME stocks of primary lead are minimal, the article reports, with just 1,500 tons in Detroit and 675 tons in Los Angeles. Yet as interesting as the Platts reference price is, there is not a liquid OTC market available for price hedging.

The article raises the possibility of a hybrid pricing model in the U.S., with those players exposed to imports pricing on the “world” primary LME price and those locked in the closed-loop secondary market pricing on a “domestic” battery price.