||2,192 20 DMA
||2,375 50% Fibo of the 2007-2008 downtrend
||2,577 2016 high (November)
||2,733 61.8% Fibo of the 2007-2008 downtrend
||2,000 Psychological level
||1,917 200 DMA
||1,552 2015 low
Lead has rebounded strongly since finding solid support slightly above its 200 DMA. Still, the metal remains below its 20 DMA so perhaps sentiment remains fragile. Still, a firm break above the 20 DMA would prompt us to change our tactical stance over the very short term (around one month).
Taking a long-term view, we continue to see a bullish breakout pattern after the break of the DTL (see monthly chart). But the market is not yet ready to enter a new bull market because prices failed to close above the 50% Fibo of the 2007-2008 downtrend in November, resulting in strong selling this month.
On the upside, lead needs to move back above its 20 DMA to shore up sentiment. On the downside, a firm break below the 200 DMA could herald the end of the 2016 uptrend.
LME lead continues its rebound this week, in part reflecting a stabilisation in the base metals thanks to a weaker dollar and encouraging Chinese inflation data.
Global demand for refined lead was supported by a robust automotive sector last year.
- US sales, up 0.4% year-on-year in 2016 and at their highest since 2005 (Autodata).
- Chinese sales in January-November 2016: up 15.6% year-on-year (CAAM).
- EU sales in January-November 2016: up 7.1% year-on-year (ACEA).
China’s solid growth may continue next year after the government decided to extend the tax cut on small-engine vehicles – the rate will, however, be 7.5%, up from 5% in 2016 but below the historical level of 10%.
Global supply of lead concentrate continues to tighten, judging by falling TCs. Although the global refined market remained resilient in the first ten months of the year, as the rise in global refined production shows (see below), we would not be surprised if refined production growth slows in the coming months due to lower Chinese output – production cuts are being ordered by China’s environmental protection department.
In the physical market, rates were little changed at the start of 2017.
Flows in visible stocks (LME & SHFE):
- Visible inventories rose somewhat in December 2016, suggesting a loosening of the supply/demand balance, which would explain why outright prices dropped at the end of last year.
- LME stocks – at 193,300 tonnes as of January 9 – have edged down 1,600 tonnes or 1% so far this year after rising 7,175 tonnes or 4% in December last year. In 2016, stocks were up 3,250 tonnes or 2%.
- SHFE stocks – at 28,986 tonnes as of January 6 – are little changed since the start of the week after climbing 9,611 tonnes or 50% in December. In 2016, stocks were up 16,652 tonnes or 138% due to strong inflows in the second quarter.
- The global refined lead market was in a surplus of 10,600 tonnes in October, bringing the January-October surplus to 35,000 tonnes. In the year to date, metal production dropped 1.1% from last year and metal usage fell 2.0% from last year.
- The ILZSG expects the global refined lead market to post a surplus of 42,000 tonnes this year. It also expects a smaller surplus next year of 23,000 tonnes.
Despite the recent price rebound, we prefer to remain negative toward lead over the very short term while prices trade below their 20 DMA. But a break of it would suggest that momentum becomes friendly, which in turn would prompt us to adopt a constructive stance.
We are constructive in the short term because we think that the current price weakness is technical retracement within an uptrend. In fact, we believe lead may benefit from stronger global growth dynamics, especially while speculators are not fully engaged on the long side, in contrast to most other base metals.
We have a neutral medium-term view because prices at current levels are likely to prompt a temporary supply response while the physical market is set to remain muted. But over the long term we are fundamentally constructive because we think the tightness in the global concentrate market will progressively spill over to the global refined market.
See our December spotlight for more information (including charts).