This is the second part of a two part series. You can reach the first part here.
Consumption has been robust with rising automotive and e-bike production adding to a strong replacement battery market. North American shipments of replacement automotive batteries increased by 27.14% in March from February, and were up 6.35% from year-ago levels according to this Reuters article. The Battery Council International said in its monthly report that for the year through March, replacement battery shipments rose by 3.08% to 24,218,000 units from 23,494,868 units for the first three months of 2009. The Chinese e-bike market is also continuing to grow strongly. Sales will reach US$11 billion this year with some 22 million e-bikes produced in 2009 plus millions more of additional kits to convert ordinary bicycles to electric. Although the e-bike manufacturing sector (like much of China) is plagued with over capacity there are some 2600 firms with licenses to build but only about 1000 firms are thought to be using them firms are still ramping up production for further growth. According to an Economist article, the biggest manufacturer, Jiangsu Xinri Electric Vehicle Co, produced 1.8m e-bikes last year. One rival, Tianjin Aima Science and Technology Co, says it is gearing up to make more than 5m bikes a year; while another Jiangsu Yadea Technical Development Co hopes to triple its sales to 3m this year. Having seen how Chinese manufacturers in other industry sectors set themselves these incredible growth targets and within 12 months achieve them there is every probability manufacturers will continue to grow as anticipated. The main threat for lead demand comes from research and trials the larger producers are doing to convert to lithium batteries. As we have seen in the power tool market, lithium batteries can make rapid inroads into the existing technology in that case NiCd with devastating effects on demand. Each e-bike usually carries 4 batteries weighing some 35-60 lbs in order to achieve any reasonable range (which can be prolonged when driving at night by switching all the lights off!!). More power and/or lighter weight would be attractive selling features in high specked models.
So demand is at least currently solid and although the market is in oversupply, it has been for some time and hasn’t come as a shock so why have prices dropped back so much and where are they likely to go looking forward? The 20-25% drop in prices has been due to a sharp correction in all metals prices, particularly copper, due to the Greek sovereign debt crisis and investors taking flight at a tightening of bank lending in China. The situation in Europe is rumbling on in spite of the immediate problems of default having been avoided. Markets are now worried about long term prospects for growth if member states are having to cut deficits so severely and so early in the recovery cycle. Credit tightening in China is likely to continue, possibly even an increase in interest rates so while the surplus is not going away and production and growth are in reality likely to continue on current trends, sentiment has changed and with it the expectation of ever rising prices, at least for now. As such, lead prices probably represent fair value for fixing forward at anything below $1900 per ton. Reuters seems to feel there is good support for lead at $1850 and certainly the price bounced back from its early May low of $1875 rather promptly. For the time being the metal is likely range bound from $1950-2100 and will require a considerable increase in the general risk appetite to see prices moving above that level in Q3.