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Analysis
The broader risk-off sentiment which pushed most of the base metals prices lower, has spilled over to LME lead too. Escalating trade tensions between the United States and China hit new heights last Friday after US President Donald Trump’s administration imposed tariffs on $34 billion of China-origin goods. China has responded in kind, reiterating that it will not back down in a tit-for-tat trade war, sending fear and uncertainty into global market. But this morning, risk-on sentiment started to recover mildly, with the Shanghai Composite up by 1.9%, the Hang Seng Index firmer by 1.6% and the Nikkei up by 1.3% – all up into the close. If European trading can sustain the bullish sentiment, the base metals complex should see more short-covering. That said, the pullback in LME lead prices remains in an orderly fashion – unlike its peers such as tin or copper. This is because lead’s fundamental backdrop remains quietly positive. Global inventory levels have tightened since the start of 2018, with more potential supply constraints on the way. Ever since the US backed out of the Iran nuclear deal, fresh sanctions and a downward spiral on its currency has capped supply of Iranian lead. Meanwhile, Chinese secondary lead smelters are being forced to shut operations in light of fresh environmental inspections.
Fresh environmental inspections are likely to keep China’s domestic refined lead market tight. Government officials have started to clamp down on heavily polluting secondary lead producers after updating its regulations based on its ‘Blue Sky Plan’ initiatives. As well, a crackdown on imports of lead waste products has shaken the smelting industry - it might force smelters to consider capacity cuts which may result in a rebound in spot lead concentrate treatment charges (TCs) for both high-silver and low-silver lead concentrate on a cif China basis to $20-30 per tonne. This comes at a time when underlying demand is modestly strong. The International Lead & Zinc Study Group (ILZSG) pegged lead usage in the first four months of 2018 at 3.86 million tonnes, an 0.8% increase from last April of 2017. The study group now estimates global usage to increase by 2.7% in 2018 to 11.90 million tonnes amid increased usage in China and the US. |
All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.