While everyone is debating the future of copper, gold and silver after the dramatic mid-April sell-off and recent bounce to the upside, here’s an investible metal you seldom hear about: lead.
Lead — the stuff of auto batteries and bullets — is in vogue with the metals analysts, with a raft of bullish price projections owing to exceptionally tight supply and healthy auto sales in the U.S. and China.
All of the metals — both precious and industrial — are down substantially since the start of 2013, but lead has been one of the worst performers. As of May 13 the quote on a three-month futures contract on lead at the London Metal Exchange was $2,008 a ton, down 13.8 percent year-to-date. And yet, going into the second half, Bank of America Merrill Lynch metals strategist Michael Widmer, based in London, believes that lead has “some of the strongest fundamentals among the base metals.”
Widmer is the most bullish, predicting that lead, which has seasonal demand, will rise to $2,550 a ton during the third quarter and will drop back to $2,400 a ton during the fourth quarter. “What you find is that normally, there are two key demand seasons, winter and then summer. It has to do with very hot and very cold weather, which damages vehicle batteries,” he says, noting that auto batteries account for about 80 percent of the demand for lead. The post-summer peak is in September, “when battery producers restock,” he said, while, typically, the second quarter is the weakest.
Widmer is forecasting a full-year average of $2,363 a ton for 2013, higher than both the commodities research team at Goldman Sachs and Société Générale’s Robin Bhar, the firm’s head of metals research in London, with reports from both projecting $2,300 a ton as their 2013 average. Société Générale is in agreement with $2,400 a ton as a good number for the fourth quarter, but its third quarter number is lower than BofA Merrill’s, at $2,250 a ton. Goldman has a more conservative near-range forecast of $2,150 a ton over the next three to six months.
There are a number of reasons why the demand for lead is rising, while growing the supply is problematic.
Exposure to lead can be toxic, and it was long ago ruled a probable human carcinogen by the Environmental Protection Agency. Given the number of primary smelters that have been forced to shut down over the past three decades due to new environmental regulations, half of the world’s supply now comes from recycling, Widmer says. In the U.S. recyclers account for more than 90 percent of output, he says, and that percentage is about to grow even larger. By the end of 2013, the last primary lead smelter in the U.S. — a 120-kiloton facility located in Herculaneum, Missouri, and owned by the Doe Run Company of St. Louis — is scheduled to close. Meanwhile, the supply of scrap batteries for recycling “has been extremely tight, causing supply squeezes, especially in the U.S.,” and that’s already resulted in the closure of some secondary smelters, Widmer said in one of his reports, where he also noted that “large increases in scrap supply [were] unlikely.”
Overseas, Doe Run is in the process of restarting its 100-kiloton La Oroya primary smelter in Peru, which had been closed since 2009. In Italy Glencore’s Porto Vesme 100-kiloton primary smelter recently restarted, and other plants are going back into operation in places as diverse as Bolivia and Kazakhstan. The push for production overseas is due in part to the high premium being paid for the refined lead that is being imported into the U.S., Widmer says, with U.S. imports jumping to almost 45,000 tons in December 2012, up from less than 10,000 tons in October.
And in China, “the auto market has picked up strongly,” with sales expected to surpass 20 million units in 2013, according to the China Association of Automobile Manufacturers, notes Simona Gambarini, associate director and research analyst at ETF Securities (UK) Limited in London.
What’s also “proving to be a bonus for lead demand” is the “expansion of wireless networks and telecoms upgrades in North America and Europe,” says Société Générale’s Bhar. “Chinese lead demand will be further boosted by plans for the world’s largest 4G network to be built this year and the replacement [battery] sector for e-bikes,” he added.
Not all analysts are quite so bullish, however.
In its latest forecast, issued in April, the International Lead and Zinc Study Group (ILZSG), based in Lisbon, Portugal, says that the market for lead should “remain in surplus this year,” but it will be a “moderate” surplus of 42,000 tons, much less than it anticipated in October, when it put the 2013 surplus at 174 kilotons. The group says the downward revision was “mainly due to lower forecasts for metal production.” However, it says it does expect global mined lead output to increase by 3.5 percent to 5.43 million tons in 2013. (Lead and zinc are often mined together.)
Stocks of LME lead “are down by more than 110,000 tons since last December, with total holdings now at just under three weeks of consumption,” says New York–based INTL FCStone metals analyst Edward Meir in his monthly forecast for May, issued on May 6.
“In addition,” he notes that the expected excess supply of roughly 40,000 tons “is not large and should not significantly alter lead’s relatively tight ending stock ratio,” and that the growth in demand is outpacing the growth in supply “with this largely attributable to the relatively resilient global automobile market,” where Europe is the exception.
“Despite this,” he continues, “we think that lead will struggle over the course of May and project a $1,900 to $2,075 trading range.”
