Lead, Set for Further Declines

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The general consensus last year was that the lead market, while well supplied, had such good demand fundamentals that prices and market balance should remain solid going forward.  Where lead was in co-production with zinc, capacity for which had been idled in 2009, capacity was only slowly coming back on stream yet demand for auto batteries and e-bikes in Asia was driving ahead strongly.  Well the pendulum has not now swung the other way but it has lets say swung towards a less favorable outlook. According to the International Lead and Zinc Study Group’s (ILZSG) reported in a Reuters article, the global lead market was in surplus by 34,000 tons in the first five months of this year. Global refined lead use was 3.495 million tons compared with 3.408 million in January to May 2009. World refined lead output was 3.529 million tons, up from 3.502 million tons a year earlier.

However looking back to May’s ILZSG figures it would appear the cumulative position for the first four months was worse than for the first five months suggesting May’s figures showed a supply deficit. The surplus for the first four months was 46,000 tons, suggesting May must have been in deficit by 12,000 tons. China produced 1,248,000 tons of refined lead in the first five months of this year, down 6.4% from the same period last year, according to the National Bureau of Statistics. Indeed China imported some lead in May for the first time this year. Production capacity has been hit in China by environmental issues, water scarcity following a prolonged drought and lower processing fees. Some 10% of production capacity is expected to be hit in China’s main lead producing region due to environmental clean up campaigns, some 50,000 tons out of 500,000 tons of capacity in Yunnan province alone.

China consumes 40% of the world’s lead but the market is broadly in balance as the country is a major lead miner, recycler and refiner. Production has been slowing though as demand has fallen, largely due to sizzling growth rates in the automotive, e-bike and telecommunication battery markets have slowed since last year, according to a Wall Street Journal article. With more stable demand rather than double digit growth seen for the next 6-9 months in China, the country could return to exports or to idling capacity as high inventory levels are worked down. Either way now would not be a good time to be fixing prices far forward as the lead market probably has a little further to go before hitting bottom.

In January, the twice-yearly Reuters base metals price poll of analysts put the median average for the LME cash at $2,252 a ton in 2010. Credit Suisse in a recent investors report put the average for 2010 at $1,962.45 a ton with the prediction the price will fall further this year to $1,565.55 a ton by Q4, before recovering next year. The bank sees lead at $1,852.20 a ton in Q1 and $2,006.55 in Q2 with an average for 2011 of $1,896.30 a ton.

–Stuart Burns

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