Analysis
- Three-month lead prices are rebounding again having given back in December all the gains made between the October low and the late-November high.
- The rebound has climbed back above the 20 DMA and is looking strong with the stochastics rising in line with the rally.
- The run up in November seemed to run ahead of the fundamentals – if you look at the month chart, inset, the rally climbed above the highs seen in 2012-2015, which seemed too much too soon.
- We would now look for range trading in the $2,150-2,300 per tonne area.
Macro factors
Lead prices looked over-extended during the surge higher late in November so a correction is of little surprise. But the extent of the correction is surprising.
LME data shows little change at the moment – stocks are at best drifting lower, the spreads are slightly firmer and there are no large holders of nearby metal.
We are still waiting for a more meaningful downward trend in LME stocks – it is difficult to be too bullish for prices when stocks are not falling.
But we expect ILZSG data to start to show a tighter supply/demand situation – mine output has been falling at a faster pace then primary refined production, which should eventually lead to a depletion of concentrate stocks that should affect refined primary production. Indeed there are already reports of some zinc/lead smelting capacity being idled as concentrate shortages bite. This should lead to further draws on Exchange stocks – if seen that should boost sentiment that may then support higher prices again.
Strong US auto sales in December bode well for demand. Sales of 18.4 million units (annualised) last month was the highest total since 2005.
Stronger economic/industrial growth also bodes well for industrial battery demand. According to Futures Market Insights’ latest global Lead-Acid Battery Market Analysis, stationary industrial battery demand is expected to see compound annual growth rate (CAGR) of 8.6% in the 2014-2020 period, with grid storage batteries – one of the current smaller segments of the lead-acid battery market – expected to see CAGR of 7.3% during the period.
Conclusion
An overdue correction has now been seen and we expect prices to now adjust to find equilibrium where supply and demand are matched – much will depend on how much interest investors and funds show. In recent months the gross long and short fund positions have been declining, but more recently both sides have increased their positions slightly.
Further cuts at primary smelters should tighten up the supply fundamentals, which bodes well, but until we see more of a drawdown on exchange stocks, prices may struggle to recapture the high ground seen in November.
