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Lead, what’s in store for the battery metal in H2 2018?

  • Lead’s supply remains inadequate against a stable growth in demand
  • Demand deficit seen in the past 3 years is anticipated to continue in 2018 as well
  • Falling inventories and backwardation additionally supports price movement 

 

Lead, the silvery bluish metal is mainly used in batteries, which accounts for roughly 85% of all its consumption. These batteries, in turn, are primarily used in automobiles along with numerous other energy storage applications. Lead is also used for roofing in the construction industry and as a radiation shield in the healthcare industry among other industrial applications.

Notwithstanding, its wide and critical use in industry, direct or continuous contact with the metal can result in severe environmental degradation, whereas it can also affect human health. Several nations have imposed a complete ban on lead mining, while few others placed strong regulations pertaining to its exploration, extraction and smelting. Over the years, this has weighed on the supply of lead through mining, while recycling has taken a front seat for its global supply. Moreover, among all the major base metals, lead is the only metal that has a record recycling rate – more than 95% of lead batteries are recoverable and recyclable.

Europe and North America have battery recycling rate of almost 100%. Globally, more lead is produced through recycling (secondary production, ~55%) than through mining (~45%).

Nevertheless, during the last few years, the total supply both recycled, as well as new additions through mining have been insufficient to meet the growing demand for lead. The industry was in a surplus during 2009-14, however, it moved to a deficit in 2015 and since then the shortfall has been widening successively year after year. The deficit expanded from 30,511 MT (2015) to ~420,000 MT (2017), which was driven by a high growth in the demand (~3.4% CAGR) compared to the supply (1.64% CAGR) during the above period (Source: WBMS [World Bureau of Metal Statistics] Data). 

In the past few years, the demand for lead batteries and hence for the metal was largely driven by a healthy growth in the automotive sector. This growth in demand outweighed the supply. On a broader perspective, global lead supply increased by ~2.8% in the last decade (2008-17) as compared to ~3% growth in the demand. Although supply did improve in Q1 2018, it was still not enough to compensate for a high demand for the metal. The global refined lead production rose by 3.8% (Q1 2018) to 2.92 million MT, which was backed by a strong growth in the mined output. This stepped up by 10.6% YOY from 1.25 million MT to 1.38 million MT.

The output fell in America, though it saw a reasonable rise in Europe. A major push came from China, which witnessed a 15.6% rise in the production to 0.75 million MT. The country is the largest consumer and the producer, it has been contributing close to 50% in the global primary lead supply. While mined output increased, overall supply growth was capped as secondary lead production remained flattish on a YOY scenario to ~1.55 million MT. The introduction of stricter regulations to curb pollution in China saw a closure of several zinc-lead mines in the past few years and government’s crackdown to shut illegal smelters affected the secondary production. The demand grew by a modest 1.1% to 2.98 million MT in absolute terms, thus adding onto the deficit situation which stood at ~60,000 MT Q1 2018.

The expanding deficit also had its effects on the metal’s stocks as recorded at the LME. The lead inventories registered a near continuous drop since Oct. 2011 when it touched ~390,000 MT levels. The stocks fell for 4 out of the 6 preceding years (up to 2017) if one tracks the average inventory data at the LME. Its stocks faced a monstrous decline of around ~27% in 2017 alone, which reduced by another 7.5% during the first half of 2018. The internal stock data as seen through On and Cancelled warrants also moved in a manner wherein it supports a case for a continuous dip in the inventory in the upcoming months. The average weekly Cancelled warrants data which stood at ~21% (2015) stepped up close to 34-36% range (2016-18 [1st 6 months average]). A squeezing supply and a vanishing inventory resulted in a ~35% surge for lead LME 3M prices from 2015 to June 2018 with gains of ~24% in 2017 alone. It also reached a 7-year high in Feb. 2018 when it surged to USD ~2,700/MT level. 

The supply side issues also got a reflection in the metal’s spot prices-in isolation as well as in comparison to its forward contracts (of different maturity).

The lead spot to forward contango has been continuously reducing since 2015, while the spot prices even moved into backwardation in 2018. The average spot and forward movement for 3M, 15M and 27M LME lead has been portraying a near similar trend over the past three and a half year. A continuous squeeze in contango while movement into backwardation is an indirect reflection of a tightening of supply, which is also visible in the actual demand-supply numbers as stated above.

Overall, the data points on inventory, price movement, primary and secondary supply and actual demand support the optimism in the silver-bluish metal. While, of late, primary supply did increase at a respectable pace, the total refined metal supply is still inadequate to meet the persistent growing demand as mines and smelters have shut down in China (due to environmental concerns), append the deficit scenario. According to a recent note from the ILZSG (International Lead and Zinc Study Group), the global demand for lead is anticipated to increase by 2.7% in 2018 and is expected to reach 11.90 million MT, while supply (inclusive of primary and secondary production) is expected to rise by 3.8% to 11.88 million MT. This may lead to a modest deficit of approx. 17,000 MT. The data from WBMS, however, portrays a completely different picture with a deficit of ~60,000 MT seen in Q1 alone. Televisory believe the ILZSG numbers would be revised upwards while a deficit situation is likely to continue at a higher rate in 2018. Furthermore, as the metal already trades near its multi-year high, gains from here might be less, though broader positivity is expected to continue over short to medium-term backed by internal fundamentals. Televisory expect the 3M LME lead prices to trade in a range of $2100/MT (on the lower side) to $2800/MT (on the higher side) with a positive bias. 

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