Lead Glut Diminishing as Bear Market Shuts SmeltersJoe Richter and Agnieszka Troszkiewicz
Lead’s longest supply glut in a decade is easing as smelters shut just as global sales of cars, whose batteries are the single biggest source of demand, expand to a record.
Production will exceed consumption by 20,400 metric tons next year, from 52,200 tons in 2013, according to the average of nine analyst forecasts compiled by Bloomberg. The market last had shortages in 2009. Lead contracts will advance 11 percent to $2,340 a ton on the London Metal Exchange by the end of March, the median of 11 estimates shows.
Stockpiles of the metal, 80 percent of which goes into batteries, are contracting the most of any industrial metal tracked by the LME just as global car sales are poised to rise to 87.1 million. Yunnan Tin Co. is among dozens of smelters in China idling plants after prices tumbled 30 percent in 2 1/2 years, according to metals researcher CRU in London. About 12 percent of mines are unprofitable at current prices, industry analyst Wood MacKenzie Ltd. estimates.
“It’s not a market that is yet in deficit, but there is a trend in that direction,” said Stephen Briggs, an analyst at BNP Paribas SA in London who has tracked metals for three decades. “There is a threat of supply cutbacks, and meanwhile, the long-term story is nobody is investing in new lead mines.”
Lead fell 8.8 percent to $2,126 on the LME this year, extending its decline from the all-time high of $3,890.15 reached six years ago to 45 percent. Prices tumbled into a bear market again in May, the 10th since the record. The Standard & Poor’s GSCI gauge of 24 commodities fell 0.5 percent since the end of December. The MSCI All-Country World Index of equities jumped 15 percent, and the Bloomberg U.S. Treasury Bond Index lost 2.8 percent.
Credit Suisse Group AG and Societe Generale SA expect shortages next year while Barclays Plc says consumption will rise 4.7 percent to 11.07 million tons this year, outpacing the 4 percent gain in output to 11.04 million tons. The Lisbon-based International Lead and Zinc Study Group said demand exceeded supply by 41,000 tons in the first seven months of the year.
Yunnan Tin, based in Kunming, China, announced the idling of its 100,000-ton lead smelter on Aug. 23, citing the slump in prices. China accounts for about 45 percent of supply. Doe Run Co., a closely held company based in St. Louis, plans to close its Herculaneum smelter in Missouri at the end of this year. The U.S.’s only primary lead refinery produced almost 130,000 tons in 2012, company data show.
Stockpiles in global warehouses tracked by the LME fell 24 percent this year and those monitored by the Shanghai Futures Exchange retreated 33 percent since the end of March, according to data from the bourses. LME-reported reserves of 244,100 tons are still 71 percent higher than the 10-year average of 143,000. A combined 63,400 tons were added to warehouses in Vlissingen, Netherlands, on Sept. 13 and Sept. 17.
Excess output began in 2010 and the cumulative surplus reached 242,000 tons since then, according to the International Lead and Zinc Study Group. That’s enough to make about 25 million car batteries, each containing 9 kilograms (19.8 pounds) to 10 kilograms of lead, the London-based International Lead Association estimates.
There are signs that demand may be weakening, with orders to withdraw metal from LME warehouses dropping 59 percent since May. So-called canceled warrants now stand at 68,875 tons, the lowest level of orders in 13 months. Lead for immediate delivery is trading at a $26.50 discount to the LME’s benchmark three-month contract, from as little as $1.75 a month ago, indicating easing concern about near-term supply.
The most recent mine data from the study group showed output grew 4.7 percent this year through July from the same period in 2012. Global production that surged in June as an expansion in China outpaced contractions in the rest of the world may cause the market to view lead’s prospects in a “less-bullish light,” Standard Bank Plc said in a Sept. 11 report, before the latest figures were published. The bank sees this year’s 19,000-ton surplus narrowing to 12,000 tons in 2014 before switching to a 118,000-ton deficit in 2015.
While 12 percent of mines are unprofitable on a total-cost basis, a figure that includes capital expenditures, that drops to 3 percent on a cash-cost basis, Wood MacKenzie says. Profit also has been diminished by the 33 percent drop in silver prices over the past year. Precious metals are commonly found in the same ore and contribute to revenue at about 90 percent of the world’s lead mines.
Global vehicle sales will rise 2.7 percent to a record 83.2 million units this year and another 4.7 percent to 87.1 million in 2014, according to LMC Automotive, a research company based in Oxford, England. Passenger-vehicle purchases in China rose 11 percent in August, the most in four months, according to the China Association of Automobile Manufacturers. Car and light-truck sales in the U.S. advanced 17 percent that month, to the most since May 2007, according to Autodata Corp.
About 65 percent of lead demand comes from automotive batteries, according to the International Lead Association in London. Sales of replacement batteries may accelerate as the Northern Hemisphere moves into winter.
Demand also is coming from manufacturers of electric bicycles in China, with each bike using about 11 kilograms of lead. The country had more than 190 million at the end of last year, 45 percent more than in 2010, according to Wood Mackenzie, based in Guildford, England. Production rose to 5.31 million units last month, the most since September, government data show.
The introduction of a fourth-generation wireless standard will boost demand for batteries used in expanding mobile-phone networks that need more communication towers with backup power. The roll-out in Europe, the Middle East and Africa will require 8.5 million new batteries containing about 700 million pounds (318,000 tons) of lead, according to Thomas O’Neill, the treasurer of Reading, Pennsylvania-based EnerSys, the world’s largest maker of industrial batteries.
Recycled-lead smelters, which make up almost half of refined output, are even more sensitive to market weakness, according to Credit Suisse. Almost all refineries handling recycled metal in China’s Shandong and Henan provinces halted production, Credit Suisse said in a report in June.
The six-year retreat in prices means new projects failed to find backers. Lead and zinc will account for 2 percent of the $85.3 billion that producers will spend on mining expansions next year, according to Wood Mackenzie.
“We haven’t seen the kind of capital spending coming in that we’ve seen in the other metals, where the increase was like a fire hose,” said Peter Sorrentino, who helps manage about $14.7 billion at Huntington Asset Advisors in Cincinnati. “Given the supply constraints, lead is a place where we’ll probably get pretty decent price traction for a while.”