Lead May See Early Recovery From Recession

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With the auto industry in a tail spin, most western economies predicted to go into (if not already be in) a recession and even emerging market growth slowing fast one would think prospects for the lead price were all downhill. Having risen from $400/metric ton in 2001/2 to $3885/metric ton this time last year the price has since fallen back to the mid $1300’s now, but is still 300% above its start earlier this decade.

The auto industry has metaphorically hit a brick wall in North America and Europe. The US is down to 13.8m units this year from 17m in 2005 and European sales have dropped 6% this year and a further 5% fall is expected next year. Even China’s sales growth has slowed to 6-8% this year from 20% in 2005-7. Logic says with 79% of lead consumption going into batteries, demand will drop proportionally but that 79% is split into 14% in new cars, 42% in replacement batteries, 13% on stationary storage batteries and 10% on traction batteries. So if consumers don’t replace their cars they will need to replace their batteries as they keep vehicles longer. Even as car sales slow in China, electric bikes sales are soaring, with an E-bike consuming 10kgs of lead in the battery, about the same as a medium car. And with a life expectancy of only one year on bikes compared to three years in a car, lead demand is expected to remain strong in China. China produced an estimated 21.5m e-bikes in 2007 compared to just 6m cars. The e-bike phenomenon is not limited to China either. India, Indonesia and other developing countries in Asia are likely to follow China’s lead and adopt the less polluting e-bikes with positive tax incentives for consumers.

Only about 45% of refined lead comes from primary production, mostly from joint zinc-lead mines. The majority is secondary in origin and with a cost of production estimated at $1000/metric ton, the recycling industry is incentivised to continue as a major source of material. Primary production however has already begun to feel the effects of mine closures as zinc mines have been rationalized in the face of falling zinc prices. China is by far the largest producer, according to the USGS, with production equal to the next three biggest producers Australia, the USA and Peru combined. But the country is still barely in balance. This summer, the country was a net importer. Previously it has exported a small surplus. If production elsewhere in the world is unduly affected by mine closures and Chinese demand continues to grow as expected then when western demand does begin to pick up again in 2010 prices could move up sharply. Contrary to most metals world lead stocks have been trending lower this summer, such that the market is currently carrying around 2.7 days of supply. As the western world recession begins to bite, however, we can expect demand to fall further and inevitably the market will be in surplus during 2009, especially if/when the major Magellan Mine in Western Australia comes back on stream. Expect prices therefore to remain weak through 2009 and into 2010. But when demand does resume, the market will be facing considerable supply restraints which suggest the upside may be as steep as the downside has been.

–Stuart Burns

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