By Pratima Desai
LONDON (Reuters) – Unexpected shortages of lead due to supply disruptions have helped prices of the car battery metal to outperform other metals such as copper, aluminium and zinc, but looming surpluses mean this trend is unlikely to persist.
Benchmark lead <CMPB3> on the London Metal Exchange at around $2,200 a tonne is up nearly 9% so far this year compared with losses of 3%, 7% and 25% for copper <CMCU3>, aluminium <CMAL3> and zinc <CMZN3> respectively.
GRAPHIC: Lead outperforms – https://fingfx.thomsonreuters.com/gfx/ce/7/6972/6954/lead%20prices%20rebased.png
Prices of industrial metals overall are under pressure from the protracted trade dispute between the United States and China, the world’s two largest economies, which has weighed on growth, industrial activity and demand.
Behind lead’s ascent to 15-month highs above $2,200 a tonne is Nyrstar’s Port Pirie lead smelter in Australia, which halted production in May. It produced 160,000 tonnes of lead last year.
GRAPHIC: Lead prices – https://fingfx.thomsonreuters.com/gfx/ce/7/6976/6958/Lead%20price.png
In a recent production report, Nyrstar said lead output at 51,000 tonnes in the first half of the year was down 27% for the same period last year. Analysts expect Port Pirie to produce only 90,000 tonnes of lead this year.
Nyrstar declined to comment.
“Lead has been a star performer largely because of Port Pirie. But this year we are at a transition point, going from four years of deficits to five maybe six years of surpluses,” said Wood Mackenzie analyst Farid Ahmed.
Ahmed expects prices to average around $2,000 a tonne next year and nearer $1,900 a tonne in the years after.
“We’ve downgraded our consumption numbers through the year as the U.S.-China trade war dragged on and despite Port Pirie, we see a market moving into surplus which will put pressure on lead prices, but we don’t see a price collapse.”
Historically, lead is seen to be recession-proof as during cold weather more batteries need to be replaced and this is exacerbated by weak growth when many people and firms decide to replace batteries rather than purchase new cars and trucks.
Global auto sales are seen down 3% this year, according to a forecast developed jointly by J.D. Power and LMC Automotive.
“With trade uncertainty in the backdrop, global risks could pull down the U.S. economy, and with it, auto demand next year,” said Jeff Schuster, President, Americas Operations and Global Vehicle Forecasts, LMC Automotive.
Analysts expect lead demand to remain unchanged or shrink this year, for the first time since the 2008 financial crash.
Global lead demand is estimated at around 12 million tonnes.
GRAPHIC: Lead demand by sector – https://fingfx.thomsonreuters.com/gfx/ce/7/6971/6953/Lead%20demand%20by%20sector.png
More than 85% of that will be used to make batteries, most of them destined for the auto industry, sales of which have been falling in many countries around the world.
GRAPHIC: Lead vs auto sales – https://fingfx.thomsonreuters.com/gfx/ce/7/6973/6955/US%20vehicle%20sales%20vs%20lead%20prices.png
“We thought 2019 would be a surplus year. We are now forecasting a deficit of 50,000 tonnes this year, but the final number will depend on whether Port Pirie comes back soon,” said CRU analyst Neil Hawkes.
“Losses at Port Pirie and other smelters have been partially offset by weaker demand, but we are going into a seasonally strong period for lead demand so prices should be supported.”
Adding to lead shortages is Glencore’s <GLEN.L> Belledune smelter in Canada where workers have been on strike since April. It produced 76,000 tonnes last year and is expected by analysts to produce 50,000 tonnes this year.
Glencore declined to comment.
GRAPHIC: Lead stocks – https://fingfx.thomsonreuters.com/gfx/ce/7/6974/6956/LEAD%20STOCKS.png
Draws on lead stocks at LME registered warehouses, below 70,000 tonnes and down nearly 20% since Aug. 1, also suggest supply falling short of demand, traders say.
But they say that the lead in LME warehouses does not meet the quality requirements of the battery industry and that it needs to be resmelted.
“Speculators are long of lead, for now,” one trader said. “But the lead in LME warehouses isn’t really fit for purpose, can’t really be used. Unless someone bothers to clean it up, it will probably show up again somewhere else.”
GRAPHIC: Lead net speculative positions – https://fingfx.thomsonreuters.com/gfx/ce/7/6975/6957/Lead%20net%20speculative%20positions.png
(Reporting by Pratima Desai, additional reporting by Mark Potter, editing by Louise Heavens)