Lead price analysis and forecast for Q4 2015

Each Quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the precious and base metals – The Sucden Financial Metals Reports, Oct 2015.

Below is the lead report, to read 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 – Scrap supply tightness looks likely

Summary
Lead prices dropped to a low of $1,618.50 per tonne in August when turmoil in Chinese equity markets prompted risk-off trading. But more particular to lead, when households suffered losses in equities, their ability to purchase cars suffered. Chinese auto sales dropped in August for the second consecutive month. Contagion from China has also hit other emerging markets, which is leading to some sharp falls in spending on expensive items such has cars, which will slow global vehicle population growth. Since more than half of refined lead comes from recycling lead, we are surprised scrap supply has not been more price-elastic.
Lead Q3 2015 - Historical Price Graph
Lead supply and demand chart

Overall trend – The lead market has been trending lower while sentiment for metals has turned increasingly bearish, reflecting the slowdown in China and bouts of economic weakness in Europe. With lead heavily tied into the auto and e-bike markets, it is unsurprising that lead demand growth has slowed but we would have thought that lower price levels would have prompted a greater supply response from scrap merchants. Although they would still collect scrap, we expected them to hold back from processing it and selling into the supply chain. The fact this does not yet seem to be that case suggests that the secondary industry lacks the finance to be able to do so to any great extent. Still, we feel prices will struggle to stay at these levels for too long – although the supply/demand fundamentals look balanced now, they are likely to tighten as some mine supply is retired – MMG’s Century mine and Vedanta Resources’ Lisheen mine will close in the fourth quarter following the closure of Paroo Station in Australia earlier this year. The fact prices are not responding to these developments indicates how fixated the market is on poor demand news, especially out of China. Since we feel the futures market is out of sync with the forward fundamentals, we expect prices to be supported around $1,620 and to work back towards $1,750, with possible spikes above that.

Lead demand in China – The slowdown in China’s economic growth, restrictions on vehicle usage/sales in some cities, improved mass transit systems and changes to household spending wrought by the roller-coaster stock market – money diverted into the stock market was lost in the rout – have dealt a blow to vehicle sales and therefore the country’s vehicle population growth. In turn, this has dampened demand for lead-acid batteries and, with fewer e-bikes being used, we expect scrap availability to have lifted secondary production in the country. Auto sales growth in China has slowed this year but, more worryingly, month-on-month sales have slipped, with August sales down 3.4 percent on August 2014. While China accounts for more than half of emerging market vehicle sales, the markets in Brazil and Russia have also been plunging this year. China’s slower auto market is both cyclical and structural; although we expect continuing growth, we do not see it returning to strong growth any time soon. And although industrial demand for batteries is a growth industry, lead-acid batteries face increased competition from other types such as lithium-ion batteries, the cost of which has fallen as usage has expanded fast.

Production – Although demand has hit a soft patch, low prices have also hit supply, with 85,000 tonnes per year of capacity closing earlier in the year at Paroo Station while mine and refined output in China has also been falling. In the first eight months of the year, China’s concentrate production fell 5.6 percent to 1.61 million tonnes and refined output was off 4.1 percent at 2.58 million tonnes. The closure of Century could take 60,000 tonnes of lead in concentrates out of the market and Lisheen around 23,000 tonnes. Paroo, Century and Lisheen collectively account for some 168,000 tonnes, about three percent on global mine production. Combined with the likelihood that low lead prices reduce the availability of scrap metal, diminishing the incentive to collect, this suggests that both primary and secondary supply will tighten in the months ahead.

Funds net short lead – Money managers on the LME started the year net short lead but they swung heavily long in May, with a net long position of 22,622 lots. This dropped to a low of 2,247 lots in July before oscillating sideways to higher. We feel lead has some good fundamentals, so once investor interest returns to the metal markets, lead may be one to benefit the most.

Lead chart - cash to threes spread

Lead is trading either side of $8 contango. The tighter spread associated with the large warrant cancellation has now dissipated – the stocks have been drawn down – only to see half put back on warrant in Busan. Stocks are getting lower again so tightness may reappear.

Lead Chart - Stocks and 3m prices

LME prices rose earlier in the year when stocks were falling at a fast pace. While they turned lower once stocks jumped in June, prices have yet to react to the most recent downturn in stocks. This supports our view that prices are out of sync with the fundamentals.

Lead chart - stocks and cancelled warrants

LME lead stocks have started to trend lower again and at 168,600 tonnes they are not high. Interestingly, shipments into LME warehouses have been infrequent, which suggests there is not much of a supply surplus around. SHFE stocks have flattened out in the very low ground at 14,716 tonnes.

lme commitment of trader - Money managers lead position

The LME commitments of traders report shows how the long and shorts camps have both cut exposure. Having swung from net short to net long, the balance of longs and shorts has been fairly stable. With prices down at these levels, we would not be surprised if fresh buying emerges but there will less short-covering into any rally.