Each quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the precious and base metals – the latest are Sucden Financial Metals Reports for July 2016.
Below is the lead report. To download a PDF copy of the full report, please click here.
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Lead – Waiting for deficit
Lead prices have been in a broad sideways trend between $1,550 and $1,900 per tonne since July last year. Overhead tails on the monthly chart show overhead supply continues to dominate. The latest rally early in July seems to be suffering the same fate. The overall pattern over the past year, however, shows a saucer-shaped base may be developing. This bodes well for the price outlook and would fit in with our view on the fundamentals. The brighter outlook could be scuppered by fallout from the Brexit vote, should that lead to a slowdown economic activity.
Overall trend – Lead prices rallied to $1,895 in March, dropped back to $1,626 and then rallied back to $1,882, which is around where they are now consolidating. A push above the March high would look constructive – it would confirm a base is in place and would open the way for prices to work higher. Given production cuts, mine closures and a generally robust auto market, especially in China and Europe, as well as strong growth in the industrial battery market and relatively low stocks, the fundamental outlook for lead looks sound. Prices have, however, been in no hurry to rally until recently. Lead prices have climbed 22 percent while zinc, which shares many of the same supply issues and has higher stocks, has rallied 50 percent. So we remain bullish for lead.
Market still in supply surplus – The market was in a supply surplus of 24,000 tonnes in the first four months of the year, according to International Lead and Zinc Study Group (ILZSG) data, with April showing a surplus of 11,300 tonnes. The data shows mine production falling five percent to 1.454 million tonnes over that period; refined output fell 1.8 percent to 3.393 million tonnes and consumption fell 2.5 percent to 3.370 million tonnes. Secondary lead production was down 3.5 percent in January-March compared with the same period of last year. With mine production and secondary production both falling faster than primary refined production and consumption, the trends are pointing to a faster slowdown in the former. All the slowdown in lead consumption is accounted for by China, where consumption dropped 171,000 tonnes in the first four months of the year, while consumption in the world ex-China grew 85,000 tonnes. Chinese auto sales are positive and demand for industrial batteries is in the early stages of growth (which tends to be fast), making it difficult to understand why Chinese apparent lead consumption is falling. If (and once) ILZSG data starts to show a supply deficit, we would expect sentiment towards lead to turn considerably more bullish and for prices to catch up with zinc again. At the start of the year, lead prices were at a $190 premium to zinc prices; lead is now at a $270 discount to zinc.
Auto sales remain robust and industrial batteries sector is a growth industry – Auto sales remain upbeat, with global car sales up four percent in May, extending the string of gains since last September. Western Europe and China are seeing double-digit growth, helped by a recovery in the labour market, which is releasing pent-up demand from first-time buyers. The global vehicle production is expected to continue to expand in the second half of 2016, with Asia ex-China also seeing stronger growth. Globally, car sales are seen rising three percent to 74.55 million cars in 2016 compared with 2015. So while lead-acid battery sales for cars are steady and providing the bulk of lead demand, the massive potential for growth in industrial batteries, used for energy storage and back-up power, should provide another layer of strong demand growth, with forecasts suggesting a CAGR of six percent between 2015 and 2022.
What is lead waiting for? – Given falling supply, especially mine supply, and the likelihood of rising demand, given auto sales and organic growth for industrial batteries, we feel the official data on lead usage has fallen behind the curve. We would not be surprised either if past data is revised higher or if data for future months makes up for what we see as under-reporting. With LME stocks relatively low at around 185,000 tonnes, accounting for 1.7 percent of annual consumption, and SHFE stocks at 32,400 tonnes (less than one percent of Chinese annual consumption), there is not a large stock cushion to feed a supply deficit should one exist.
Conclusion – Since lead’s fundamentals look tighter than its market performance suggests, we remain bullish on the metal, expecting a third-quarter range of $1,700-1,950 while keeping our forecast at an average of $1,800 for the year as a whole.
LME stocks are responding to the backwardation, with spread tightness attracting metal to LME-registered warehouses. This suggests there is lead sitting off market, even if the contango has not been very attractive in recent years – it has averaged $7.5 per tonne since the start of 2015.
The prospect of mine closures has affected zinc prices more than lead, as the pick-up in zinc’s premium to lead during bull market phases shows. The fact the closures are affecting lead as well seems to be largely ignored by the market. This may be because the market expects secondary supply to make up any shortfall.
LME lead stocks are in mid-range but at 185,000 tonnes they are considerably higher than the 127,500-tonne low reached in December. Cancelled warrants have picked up as well to account for 39 percent of total LME stocks compared with 27 percent at the start of the year.
The LME commitment of traders report shows the money manager longs have been cutting exposure since February. More recently, shorts have been covering at a faster pace, which may well partially explain the run-up in prices. A lack of fresh buying suggests prices may struggle on the upside.