Lead, will the bearish momentum continue in 2019?

• Lead prices generate a negative return in 2018, weakening economic developments and trade tensions to blame?
• Headline demand-supply numbers provide support though mined supply anticipated to increase
• Macro-economic cues and demand from automobile to drive prices in future

Lead, the silver-greyish metal registered negative returns in the year 2018 along with other major base metals which also fell during the year amid weakening economic cues globally alongside inflicted US-China trade tensions. The lead LME 3M price fell 17% during the year, closing nearly $2,050/MT levels, while this also touched a more than a two-year low, nearing $1,950/MT mark in the month of December.

According to demand-supply fundamentals, the data from ILZSG** shows that lead’s mined supply during 2018 most likely dropped by around 2.8% to 4.58 Mn MT, while refined production managed a modest increase in the range of 1% to 11.65 Mn MT (**Data for 12 months extrapolated from ILZSG actual figures provide for 11 months, 2018). A marginal increase in the refined output was supported by healthy growth in the secondary supply, which makes for near 55-60% of the total refined output for the commodity. The refined demand for lead was seen to show a modest rise to 11.75 Mn MT (2018) and the deficit was seen at ~104,000 MT. While the deficit figures are significantly lower than the last year’s data (147,000 MT in 2017), there is a possibility of an upward revision as lead’s consumption is majorly dependent on the automobile sector in terms of batteries, which usually witnesses higher consumption in the winter season. The winters stood better in most of the major consuming economies in the current season (Nov.-Jan.) and hence, may drive the demand moderately higher.

Lead output, particularly in terms of mined production has been facing a lot of issues from governments, environment and labour organisations in the last few years amid its ill-effects on environment and health, especially during mining, which has also led to its increased use in terms of secondary production. Moreover, secondary production from batteries and other related sources has been consistently increasing over the years and now account for around 60% of the total refined supply for the metal globally. Notwithstanding the health issues, lead’s consumption is supported by the global automotive industry and other sectors as one of the key inputs for battery (~80% of lead is used in the battery segment). While battery makers are continuously looking for alternatives which are less hazardous like lithium, cobalt, nickel and silver among others, lead continues to be one of the cheapest in the lots and holds significant ground in terms of overall battery use.

Notwithstanding the constraints on the mining supply side, the metal in terms of the overall supply and demand is standing at crossroads in the current scenario. While lead’s mined supply is continuously squeezing as a few of the developed countries have forced a complete ban on mined output, like in the case of the US, some developing countries and particularly China, which is the largest consumer (refined metal) and producer of the metal also tweaked its output to a lower level (both mined and refined) amid environmental crackdown in the major mining as well as refining areas in the country. In the last few years, the metal has gradually moved into a deficit with refined production and demand growing at a CAGR of 1.6% and 2.1% (inclusive of the expected data for 2018*), while deficit stood at ~175,000 MT and over 100,000 MT in 2017 and 2018, respectively. The price of the metal gained a healthy rate in 2016, 2017 and in the early 2018 and touched a multi-year high, while at the same time it incited some miners to resume production or act on new supply. Although, lead’s supply cycle lags significantly its sister metal zinc, which had its own concerns regarding supply performed significantly better, in terms of returns in the last few years (for a detailed view on Zinc, please refer to Televisory’s blog 'Can zing be back for Zinc?'). This indirectly weighed on miners to work on for higher output for zinc as compared to lead. The deficit as seen in the last two years is more due to tightening of supply and is not backed by a significant increase in the demand, which has continued to be broadly stable over the years.

Furthermore, over the years, tightening of mined supply has eventually resulted in limited concentrate supply too, which, in turn, resulted in lower treatment and refinery charges for the metal. According to different reports, South32, one of the major miners got into a deal with smelters for a 20-40% cut in TC/RC during 2018. South32 paid ~$100 per MT against ~$125 that was paid a year earlier, wherein its concentrates are rich in silver along with lead and demand better rates. The charges for lead only mine/concentrate were seen to be even lower. Separately, there were reports of similar cuts being taken up by the major smelters in 2018. It would be interesting to see whether miners are able to negotiate on a further cut in TC/RC charges for lead smelting and refining for the current year. The scenario seems to be changing as some of the mining projects are coming on-stream, the major being the Silvertip mine in the British Columbia, Canada, which is owned by Coeur Mining and the Gamsberg mining operation in South Africa, which is owned by Vedanta. Silvertip mine started operations in September last year, while the output at Gamsberg too was initiated during the second half of 2018 and a full run is expected to be somewhere around H2, 2019. Hence, backed by reports on freshly mined output coming online alongside taking the effect of moderation in demand, ILZSG too expects the commodity to move into a marginal surplus in 2019.

On the demand related aspects for the commodity, according to Scotia Bank’s ‘Global Auto Report’, the global auto sales declined marginally in 2018 by 0.7% mainly weighted by a fall in the automobile sales in China, the world’s largest market, this was due to government’s tightening on non-banking financial institutions. The sales were significantly down in China, especially in the second half, while Europe too saw a fall in the auto sales during the second half of 2018. Whereas growth was supported by the US, a few of the European countries, Russia, Brazil and India among the major nations, it was still not enough to curtail the downside. Auto sales are expected to be flat in 2019, though a fresh round of economic concerns in European countries, deceleration in Chinese economic data and modest issues arising in the US may turn the tables to a moderately weaker trend in the auto sales globally. On a broader perspective, expectations of rising mined supply and weakening demand scenario depict a moderately bearish trend for the commodity over the short to medium-term.