By Carolyn Pairitz
Lead is a heavy metal that has been used for thousands of years in a wide variety of applications, including building and construction. Lead deposits are abundant in many regions around the world, and the metal is relatively easy to extract from the ground. Because it is widely used in construction and other industrial applications, lead has some appeal to investors looking to bet on increased demand for raw materials. There are a number of different options for investing in lead, including exchange-traded futures contracts, stocks of companies engaged in the extraction and sale of the metal, and exchange-traded products.
Physical Properties And Uses Of Lead
Lead, which carries the symbol Pb, is a soft and malleable metal that has a gray color once exposed to air and silver color when melted into a liquid. In certain forms and quantities, lead can lead to blood disorders or poisoning, especially in animals. Lead is extremely resistant to corrosion, a physical property that makes the metal ideal for handling corrosive liquids and multiple applications in construction.
In addition to its uses in roof shingles and other aspects of construction (such as lead pipes), lead is used in batteries, ammunition, and weights. Because of its high density and atomic number, lead can also be an effective shield against radiation, which accounts for its use in medical vests.
Lead Supply And Demand
Demand for lead has climbed in recent years thanks to rising demand from emerging markets such as China and India that have begun aggressive infrastructure initiatives and are experiencing rapid urbanization. Global mine production has also been on the rise, thanks to increases from Australia, China, and India, among others in the past.
China is by far the world’s largest producer of lead, accounting for as much of the metal as the next five countries combined. China is also one of the biggest users of lead, though it does export to the U.S. and other destinations (Canada is the largest exporter of lead to the U.S., followed by Mexico). Within the U.S., a handful of lead mines in Missouri, Idaho, and Alaska account for nearly all of domestic mine supply.
The lead-battery accounted for close to 90% of lead usage in the U.S. in 2010, followed by the building and construction industry. Lead acid batteries are used primarily in automobiles and as industrial batteries for uninterrupted power-supply to equipment for computer and telecommunications networks.
Recycling also accounts for a significant portion of lead supply; in 2010 about 1.15 million tons of recycled lead was produced, accounting for more than 80% of reported lead consumption; most of that total was recovered from post-consumer scrap.
Lead deposits are found around the globe, meaning that the risk of supply disruptions is relatively low. Moreover, reserves are well balanced and the presence of recycling operations as a major source of supply further lessens any supply-related risks.
|Country||2010 Production||2011 Production||Reserves|
|Source: U.S. Geological Survey (all info in thousands of tons)|
As a global commodity, the price of lead is impacted by a number of factors and is often subject to significant price swings in a relatively short period of time. The major price drivers of lead include:
- Emerging Market Demand: Lead demand has climbed higher in recent years thanks to urbanization in emerging markets such as China and India; as emerging market populations move to cities, the need for new residential housing, other construction, and automobiles has climbed. China in particular is a major user of lead and also by far the world’s biggest supplier. More construction activity translates into higher demand for lead.
- Health of Construction and Automotive Industries: In the U.S., the majority of lead is used to manufacture lead acid batteries. Automobile usage accounts for a significant portion of the end use of these products, creating a link between the financial health of carmakers and the demand for lead. Construction applications, such as lead pipes, create a link to home manufacturers and other builders.
- Substitutions: As the market share of lead-acid batteries is gradually eroded by lithium ion and other more environmentally-friendly alternatives, demand for lead may decline. To the extent that this adoption accelerates or slows in coming years, lead prices could be impacted.
- Tariffs: Tariffs on imported lead are modest, and major external suppliers of lead to the U.S. are nations with whom we maintain strong trade relationships. It should be noted, however, that China accounts for a significant portion of global lead supply, and frictions with the country could have an impact on the supply and pricing of the metal.
Investing In Lead
Lead has appeal as an investable asset for several reasons. Because demand is related to the health of the construction and automotive industries, the metal can act as a leveraged play on the overall global economy. Moreover, lead can provide an effective inflation hedge in certain environments. There are a number of different ways to gain exposure to lead, including exchange-traded products and futures contracts.
Though investing in physical lead is possible, the density of the metal and low value-to-weight ratio (especially compared to precious metals), makes achieving exposure in this manner impractical.
Lead futures are traded on the London Mercantile Exchange, with contracts priced in U.S. dollars per tonne and clearable in the dollar, yen, pound sterling, or euro. The lot size for lead contracts is 25 tonnes, and the underlying ingots must be of 99.97% purity or higher. The contract code for LME lead futures is the same as the symbol for the element: PB.
Investors can also obtain exposure to lead by purchasing stocks of companies that are engaged in extracting and selling the metal. Like most companies, the profitability of lead miners and refineries depends on the prevailing market price for the products they sell. As such, these companies tend to realize higher profits when natural resource prices are elevated -- especially if significant portions of the cost structure are fixed in nature. In the case of lead, exposure to recycling companies may also provide exposure.
Achieving exposure to lead through stocks of companies engaged in the metal’s production may be challenging because there are very few "pure play" lead refineries or recyclers; most firms with lead divisions are also involved in various other metals as well.
There are multiple exchange-traded products offering access to lead as well, including funds listed in the U.S. and internationally. Currently, exchange-traded lead products achieve exposure through futures contracts, meaning that unless specified, investors are exposed to the nuances of contango and backwardation and that returns can differ from a hypothetical return on spot prices.
The iPath Dow Jones-UBS Lead ETN (LD) is linked to an index comprised of lead futures, and charges an expense ratio of 0.75%. Another iPath option is the Pure Beta Lead ETN (LEDD), which follows an index of single exchange traded futures contracts, but unlike other future contract ETPs, LEDD works to avoid contango by buying preselected contracts using the Barclays Pure Beta Return Series 2 Methodology. For international investors, ETF securities offers funds delivering both leveraged and inverse exposure to indexes comprised of lead futures.
Compared to ETPs that encompass a wider range of industrial metals, such as the Rogers Intl Commodity Metal ETN (RJZ) or the DB Base Metals Fund (DBB), lead has been spent the last year trending lower than the overall funds. This was not the case in 2009 and 2010, when most industrial metals were performing far below average, and lead remained at average, if not higher price levels than before. Due to the steadily increasing demand of lead over the last 10 years, it has become a fairly stable commodity, and a good resource for investors who prefer reliable prices.
Resources for Lead Investing:
Disclosure: No positions at time of writing.
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