Each quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the precious and base metals – The Sucden Financial Metals Reports, Jan 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 – One of our favourite metals
Lead prices continued downwards in the fourth quarter, falling to a low of $1,551.50 per tonne, thereby extending the drop from the August low of $1,618.50. With primary supply now affected by mine closures and output cuts and with secondary supply generally price-elastic, we expect refined lead supply to tighten to the extent that, even with demand weak, the supply/demand balance will show supply deficits in 2015-2017. Given low LME and SHFE stocks, lead prices could well be one of the stronger performers in 2016, we think. We expect prices to average $1,800 in 2016 and to range between $1,600 and 1,830 in the first quarter.
Overall trend – The lead market has suffered in line with the other base metals but lead’s fundamentals are in many ways more bullish than the rest of the complex. Lead primary supply is being cut not because of oversupply in lead but because of oversupply in zinc. Secondary lead supply tends to be more price-elastic because it is reliant on scrap metal being collected and sold into the supply chain. When prices are deemed too low, scrap merchants often hoard the scrap until prices rebound. Third, exchange stocks are relatively low and, with the market frequently in a backwardation, it is unlikely that there are large stockpiles being financed off market. We feel lead prices have therefore been dragged lower by sentiment rather than by bearish fundamentals.
Production cuts and closures offset new capacity – Production cuts at zinc-lead mines owned by Glencore, Nyrstar and Chinese producers might equate to a loss of some 120,000 tonnes of lead mine output in 2016. On top of that, the closures of the Century and Lisheen mines are likely to remove some 80,000 tonnes of lead supply. The October forecast from ILZSG, which took into account the closures but not the production cuts, was for supply to increase by 60,000 tonnes to 4.86 million tonnes. With production cuts now equal to some 120,000 tonnes, mine production should drop in 2016. Refined production in 2016 was set to increase by 370,000 tonnes, helped by the start-up of Korea Zinc’s 130,000 tonne per year smelter, but mine closures and cuts may well mean that this plant and other smelters struggle to get enough concentrate feed. So we would look for supply to increase by around 226,000 tonnes, equivalent to around 2.0 percent of annual consumption, while we expect consumption to increase around 3.0 percent, which should lead to a meaningful supply deficit in 2016. Higher lead prices, are however, likely to prompt a pick-up in scrap supply, which in turn will boost secondary supply capping any significant upside potential.
A mixed demand picture – China accounts for 63 percent of global lead consumption, with storage batteries accounting for 90 percent of lead’s use worldwide. In China, some 14 percent of lead’s use is non-battery, 34 percent in e-bikes, 29 percent in industrial batteries, 21 percent in vehicle batteries and 2.0 percent in motorbike batteries. Demand is facing headwinds – sales of new e-bikes are slowing and owners are not using their e-bikes as much as they have in the past because the public transport system is now much more comprehensive so replacement battery demand is not as strong as it was. Passenger vehicle (PV) sales showed signs of slowing earlier in 2015 but an October tax break on sales of PVs with engines smaller than 1.6 litres led to a rebound in sales in October and November. PV sales climbed 5.9 percent in the first 11 months of 2015, according to the China Association of Automobile Manufacturers (CAAM). How strong future sales are will be closely watched. Industrial batteries have also been a growth market for lead-acid batteries but they face greater competition from other types such as lithium-ion batteries, the cost of which has fallen while usage has expanded quickly. Outside China, US auto sales remain extremely robust, with sales in recent months holding around 18.2 million units on an annualised basis; EU sales have remained strong too, with registrations up 8.7 percent in January-November.
Conclusion – For now we think lead’s supply fundamentals are stronger than the demand fundamentals; we expect this to result in firmer prices. Over the longer term, with pollution concerns in China likely to boost the market share of electric cars and with industrial batteries and some e-bikes now using more lithium-ion batteries and less lead-acid batteries, the demand profile is not as strong as it was a few years ago. In the first quarter we expect prices to work higher towards $1,800.
The lead c-3s spread had tightened considerably, moving to a backwardation of $12, having averaged around $8 contango in the fourth quarter. This led to a pick-up in stock deliveries but warrant cancellations have jumped too – they now account for 58 percent of stocks. The spread has eased since New Year.
Vehicle sales are climbing in the main markets of China, the US and Europe. Sales in some emerging markets (EMs) have suffered; this is key for battery demand because they drive growth in the world vehicle population, which determines the amount of lead out on the roads.
LME lead stocks were getting low, reaching 127,500 tonnes early in December, but they since climbed to 191,800 tonnes. Cancelled warrants have jumped even more, with a large trading house believed be holding a large position, which late in December accounted for 50-79 percent of LME warrants. Further tightness is expected.
The LME commitment of traders report shows that the longs have been increasing exposure while the gross short position remains in mid-ground. Given the tightness in the spread, more short-covering seems likely, while the gross long position is not as long as it was earlier in the year.