Lead Backwardation Widest in Six Months as Stockpiles Fall

Lead’s premium to later-delivery contracts reached the widest level in six months on signs of limited availability and declining stockpiles of the metal.

Lead for immediate delivery traded as much as $8.15 a metric ton above the contract for delivery in three months on the London Metal Exchange today. A close at that level would be the highest since Nov. 16. Backwardation, when nearby contracts are more expensive than later-dated futures, may indicate limited supplies.

Stockpiles of lead monitored by the LME were the lowest since January 2011 today at 219,475 tons, exchange data showed. Canceled warrants, or orders to take the metal from warehouses, jumped 20 percent on May 23. About 76 percent of the LME’s total inventory is earmarked for delivery, the highest proportion among the six main industrial metals traded on the exchange.

“The stockpiles are in fairly firm hands,” said Steve Hardcastle, head of client services for industrial commodities at Sucden Financial Ltd. in London. “The canceled warrant numbers are climbing, which means warrants are not available and delivery is not available.”

Warrants are certificates giving the bearer ownership of metal stored in LME-approved warehouses. Canceled warrants climbed on May 23 on bookings at the Dutch port of Vlissingen. Lead for June delivery was $14.95 a ton more expensive than the contract expiring in August on the LME today.

Spreads Under ‘Strain’

“Heavy borrowing” took place, Hardcastle said, referring to buying of nearby-dated metal and selling of later contracts. “It’s unlikely that these canceled warrants will be re-warranted and lent back to the market, which reduces the volume of warrants available, which puts strain on the spreads.”

LME inventories of lead, used in batteries and radiation shielding, dropped 14 percent this month, the most since November 2008. Stockpiles in Malaysia fell 11 percent in May, extending this year’s decline to 52 percent.

“Of all the markets that I follow, lead is probably the one that is reasonably tight,” Michael Widmer, an analyst at Bank of America Merrill Corp. in London, said last week. “This is a market that’s not extremely well supplied.”

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