Back in October we wrote about lead and put a fairly rosy picture on prospects for the metal. We even rashly suggested that the combination of lead-zinc mine closures and strong demand from electric bikes would help support the price and limit the downside. Well so much for sound fundamental logic. We hadn’t allowed for good old fear. The LME market has continued to decrease from around $1200/metric ton at the end of October to below $900 in late December before recovering to about $1100 today. So much for our lead forecast.
So what has prompted this continued volatility and what are the prospects for lead going forward? Demand has been decimated in the new car market but as we pointed out in our previous article, for every new car not sold a replacement battery will at some stage be required for the old car, especially during winter months. However demand takes time to filter through the supply chain, especially the after market where distributors hold much more stock than the new car battery market where producers tend to deliver direct to the OEMs. The electric bike market has not been as strong as originally anticipated. The market had expected Asia, and in particular China, would continue to grow as much because of the wider consumer retrenchment than in spite of it ” as consumers favored more economical forms of transport. In practice, big ticket items have been postponed the world over and consumers in Asia have reacted no differently than those in the west. 88% of lead is consumed in batteries of one sort or another according to the USGS so the battery market is the demand determining factor on the consumption side.
Like copper, the lead market has kept in reasonable supply balance. Supply does exceed demand but not to the extent that inventories have visibly risen on the exchanges. At some 46k tons, the LME stocks are much the same as last year and the year before. According to the ILZSG, mine output has been declining since late November, mostly as a result of the closure or scaling back of joint zinc-lead mines and copper-lead mines.
Perhaps because the stock levels have not been building, producers have been slow to cut capacity. Although Chinese consumers are reported to be sitting on stocks of high priced material and instead of consuming it are importing new material at much lower prices. At some stage, these stocks will be consumed and Chinese imports will take a hit as a consequence. Comparatively little smelter capacity has been idled so far. Mine production is down but recycling levels are as strong as ever. 90% of lead in the USA is recycled and 80% of every new battery is recycled material. The figure drops to roughly half globally because many consuming countries do not have the infrastructure developed to recycle efficiently. It is expected that recycling rates will remain near historic levels so any reduction in supply this year will come largely from reduced mine production.
Supply will be getting a boost in H1 2009 if the giant Magellan mine comes back on stream as expected after having been idled for a year. Meanwhile demand is likely to drop off once the northern hemisphere winter season comes to an end around March. If smelters are not idled in the meantime expect prices to drift lower. The market hit $875/metric ton in December. Though this was during the depths of a widespread market panic, we could see these levels being tested again before a better supply-demand balance establishes itself later in the year and prices return to current levels in the $1100-1200/metric ton range. As the year unfolds much will depend on sentiment. If the auto industry makes a comeback faster than expected it will support lead prices. Watch sales figures from the major western car markets. Some analysts are suggesting prices will recover to $1345 by the year end. We don’t believe demand is going to come back that quickly and expect production capacity to be only slowly reduced as producers do not appear in any hurry to trim capacity. Buyers should therefore keep purchases short term until the spring and then look to cover further forward if as expected prices fall further.
–Stuart Burns and Lisa Reisman