Each quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the precious and base metals – The Sucden Financial Metals Reports, April 2016.
Below is the lead report, to download a PDF copy of the full report covering all the metals in pdf form click here.
Subscribers have access to these reports before they are published through the research tab in FastMarkets Professional.
Lead – Still one of our favoured metals
Lead prices have become increasingly choppy since October. Since this is taking place below the 2010-2015 lows, perhaps the market is hammering out a base. With the supply fundamentals strengthening, with exchange inventories low on the LME and SHFE and with buoyant auto and industrial battery markets, we remain friendly towards lead. The latest ILZSG data showed the market had shifted to a supply deficit in January; we expect the deficit to grow throughout the rest of 2016. We expect prices to average $1,800 in 2016 and to range between $1,650 and 1,950 in the second quarter.
Overall trend – The series of higher lows and higher highs since the November low means the overall trend may be changing to upward from the downward trend that has been in place since August 2014 despite the increased volatility. With mine supply contracting following mine closures and output cuts, the fundamentals would support such a switch. Secondary supply may well pick up into a price rebound, which is likely to dampen any rally, but with prices low compared to the 2009-2015 trading range there may well be considerable room for prices to climb to a higher range. Secondary lead supply may be price-elastic into a price rebound and hoarded scrap is fed into the supply chain but much lead mine production may be less price-elastic – miners of zinc/lead mines are likely to be guided more by zinc price. So while low lead stocks may boost lead prices, high zinc stocks may dampen the recovery in zinc prices. Overall, we feel sentiment has dragged lead prices lower rather than bearish fundamentals.
Diverging primary and secondary lead supply – Since lead prices are 9.6 percent above the November low and around the level where production cuts were announced, we do not expect shuttered lead mine output to be restarted any time soon. More to the point, with the cuts in lead coming from zinc-lead mines owned by Glencore, Nyrstar and Chinese producers, zinc prices are the factor most likely to determine when lead mine supply is reactivated. Production cuts might equate to a loss of some 120,000 tonnes of lead mine output in 2016, we estimate. On top of that, the closures of the Century and Lisheen mines are likely to remove some 80,000 tonnes of lead supply. So while we expect lead mine supply to remain lower, we also expect higher prices to trigger the release of more scrap into the market, which should boost secondary supply of lead. Prices have already become volatile; the steep rallies and sell-offs since November may well be the effect of elasticity of secondary lead supply. Although the release of lead scrap into a price rally may well dampen any rally, we would not expect this to derail a bull market should one develop.
Lead was in deficit in January: is this the start of a trend? – International Lead and Zinc Study Group (ILZSG) data for January showed a supply deficit of 7,000 tonnes in January. If a deficit remains in place, sentiment for lead is likely to turn more bullish. With the market expected to be in deficit this year and next and with lead stocks on the LME and the SHFE low, we feel prices are low given the fundamental outlook
Demand outlook improving – Demand apparently fell 8.5 percent in 2015, according to ILZSG data. A drop of such magnitude suggests considerable destocking, which means there may well be considerable pent-up demand if restocking should unfold. Auto sales in China are considerably stronger than expected, rising 7.8 percent in March and 6.8 percent in the first quarter compared with the corresponding periods of 2015, according to data from the China Passenger Car Association. Vehicle registrations in Europe climbed 10.1 percent in the first two months of the year on the same period of last year. Strong organic growth in China and strong pent-up demand in Europe after the slump following the financial crisis are bullish for lead. And while auto sales in the US are slowing, we are less worried about this – although it may hit OEM battery demand, it is likely to boost replacement battery demand. With strong growth in alternative energy, data centres and mobile technology, all requiring energy storage or back-up power supply, we expect demand for lead-acid industrial batteries to remain strong, even taking into account strong competition from industrial batteries such as lithium-ion types.
Outlook – The combination of tighter primary supply, low stocks and potential for consumer restocking suggests a bullish outlook for lead this year. We expect prices to work higher towards $1,950 in the second quarter.
Lead stocks are relatively low compared to where they have been in recent years but prices are also low, which means their inverse relationship seems to have broken down. With the lead spread having been low in recent years, we do not think there is much metal held off market in financing deals.
Vehicle sales are climbing in the main markets of China, and Europe, sales in the US have started to slow. For lead-acid automotive battery demand, we see organic growth in China as the key driver – a greater vehicle population means more lead out on the roads.
LME lead stocks are low but not as low as they were in December when they reached 127,500 tonnes. But with cancelled warrants also falling, interest in taking lead out of warehouses seems to have slowed. Should lead stocks fall further, prices are likely to take increasingly more note.
The LME commitment of traders report shows that the money manager longs have been cutting exposure since February. More recently, there has been a slight pick-up in short selling. The pullback in the long position may well make room for fresh buying to return.
Download the full report here.