By Raul de Frutos
The 3-month London Metal Exchange lead price is still climbing. Source: Fastmarkets.com
Prices are now back near new highs as bulls seem to be taking control again. For reasons we'll see below, we expect momentum to pick up again on the upside.
Global Lead Refined Production and Usage. Source: MetalMiner IndX
According to the International Lead and Zinc Study Group, in 2016, refined lead supply exceeded demand by 11,000 metric tons in the global market.
The refined market is now near balance after seeing a 32,000 mt surplus in 2015. In addition, a supply shortfall narrative is developing for this year.
Mine Output Continues to Decline
World lead mine production steadily declines. Source: MetalMiner analysis of ILZSG data
Although a deficit is still not visible in the refined market, global lead mine output continued to decline last year. In 2016, there was a sharp decrease in Australian lead mine output mainly as a consequence of the closure of the Century mine in 2015 and a 100,000 mt cutback in lead output at some Glencore (OTCPK:GLCNF) operations. These reductions were partially balanced by a rise in China, resulting in an overall global decline of 1.3%.
Treatment charges, which is what smelters charge miners for transforming raw material into refined metal, are a good indicator of what is happening in the concentrates part of the supply chain. Lead treatment charges have plummeted over the past few months. They are currently below $20 per mt, from $80 just three months ago. In this respect, lead is playing catch-up with its cousin zinc, in which the deficit for refined metal is more obvious.
In 2017, investors will be closely monitoring China's numbers. The slump in treatment charges and the fact that China must get serious about controlling industrial metals output to solve its pollution problem could result in lower lead refined output this year.
What This Means For Metal Buyers
As with zinc, it might only be a matter of time before the squeeze on raw materials translates into a squeeze on refined metal.
Prices are currently holding well and could be setting up for another rally after digesting last year's gains. Given the ongoing bullishness across industrial metals, we could see lead hitting $2,800/mt by year-end.