Where Next For Lead?

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A Reuters article this week supports comments elsewhere that demand from auto makers in emerging markets and investor interest in new exchange-traded products in base metals are likely to drive lead prices higher next year. Lead, now around $2,450 a ton, will rise to above $2,500 a ton on average, with some analysts saying it may even cross the $2,700 mark.  Demand for lead is steadier than for most other base metals, the article says, as about 40 to 50 percent is for replacement batteries, making it very resilient to ups and downs in new car sales. China’s auto sector and rebounding production in Europe and North America have boosted demand for batteries this year.

However, as scrappage schemes in Europe fade out, attention is focused on economies such as China, India and Brazil.

Vehicle sales in China could exceed 17 million units this year, Reuters quotes Deutsche Bank, who sees that rising to some 20 million in 2011.

Source: Kitco

Meanwhile, the International Lead Zinc Study Group (ILZSG) announced this week that the global lead market was in surplus by 51,000 tons in the first ten months of the year. Intriguingly, while producers’ stocks fell to 139,000 tons in October from 142,000 tons in September, up only slightly on end-2009 stocks of 135,000 tons, the LME has gone in the opposite direction. LME lead stocks are at a 10.1/2 year-high and, at above 200,000 tons, are about five times higher than two years ago.

Source: Kitco

As China fears and risk appetite waned, the rising stock position for lead, as with aluminum, meant lead’s rebound in price was not as dramatic as, say, copper, for which falling stocks are a clear sign of a tightening physical market.

The consultancy CHR Metals sees the lead market tipping into a very modest deficit next year, as Chinese consumption remains robust. Others such as BNP Paribas say the 90,000-ton surplus will remain next year and a deficit will not develop until 2012. China is both the biggest consumer and the biggest producer; demand may slow next year if credit tightening and interest rate hikes cool demand as Beijing hopes. Meanwhile, although production this year has been hit by power cutbacks, next year there should be sufficient power available from the New Year and production is expected to rise, according to state research firm Antaike, causing a surplus in the domestic market. The lead price has not responded to the general bullishness surrounding copper and like some of the other metals has struggled to make return to fall highs. One positive development could be the launch of the SHFE lead contract in the second half of next year which, according to Societe Generale, could promote arbitrage activity between London and Shanghai to lead’s benefit. The bank is forecasting $2,775 per ton next year.

Much will depend on risk appetite among investors, GDP growth and particularly auto/e-bike sales in both emerging and developed markets. On balance, we don’t see the fundamentals supporting lead at $2,775 per ton and feel $2,600 is probably the top end for the first half as supply will continue to outstrip demand, but with so much uncertainty around, a narrow 90,000-ton surplus could evaporate quite quickly, in which case the current $2,450-per-ton prices may look good come the summer of 2011.

–Stuart Burns

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