Lead and Zinc Prices Set For a Split

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Many metals have a correlation that is based on historical norms; often the price relationship is a reflection of relative production costs with deviations from the norm caused by supply or demand distortions in the market.

Think of silver and gold. The historical link is a ratio around 40:1, gold being 40 times more expensive than silver. Prior to the financial crisis, zinc prices averaged $1,000 per ton against lead’s $500 per ton — a 2:1 ratio.

Since 2009, however, both metals have moved much more in lockstep, rising to $2,500 and now down below $2,000 per ton. An FT article, though, paints a dire picture for zinc over the next year or so before mine closures ride to the rescue around the middle of the decade, whereas a Reuters article says lead’s fundamentals are much more solid, pointing to end use demand and global stock levels to make a case for lead moving into a premium price position over zinc.

As Reuters says, lead’s main usage derives from batteries. That means it is more vulnerable to slowing new automotive output, but replacement batteries are also an important part of its usage profile and one that is effectively recession-proof.

Batteries fail, irrespective of economic cycles, and with a fair proportion of supply coming from the recycling industry, mine output is less of a critical factor in supply than it is for zinc.

Although global lead stocks reached an all-time record high back in October of last year of 388,500 tons, they have been very gradually falling since. Although LME lead stocks rose 70 percent, or 143,000 tons during 2011, much of the rise in LME inventory was matched by falls in producer-, trader- and non-exchange stocks.

Hold On While I Zinc For a Moment

Zinc, on the other hand, has just burst through the 1 million-ton level on the LME alone and the reason is not hard to fathom out — zinc’s estimated surplus in the first five months of this year represented 14 percent of last year’s global usage. (That in lead represented just 4 percent of global usage in 2011.)

Indeed the only thing keeping zinc prices up could be the stock-and-finance game that traders and banks have been playing with both zinc and aluminum. 106,000 tons of zinc are lined up to leave New Orleans alone, but because of LME rules will dribble out at a few thousand tons a day.

So why aren’t zinc producers cutting production if the market is in so much oversupply? The answer is some mines co-produce lead and zinc, and sometimes with other valuable byproducts; and for others who produce just zinc, the same fundamental fact remains:

At current prices for zinc and lead producers are still making money, but if I was a betting man, I’d put my money on that price correlation widening over the next twelve months. As Duncan Hobbs, a Macquarie analyst, is quoted saying in the FT, “zinc doesn’t look good.”

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