LONDON: Playing the “ugly sisters,” zinc and lead, off against each other has been a favorite relative-value trade on the London Metal Exchange (LME) for many months.
And a highly profitable one since zinc briefly and unusually rose to a premium over its heavy sister back in July last year.
Normal service was swiftly resumed and by January lead CMPB3 was trading at a premium of over $ 300 per ton to zinc. As of Wednesday’s close the gap stood at $ 268.50 per ton.
While that lead premium should remain in place, given a more bullish set of underlying dynamics, there are also good reasons to expect a narrowing of the differential over the coming weeks and months.
Remember, this is a relative play between two metals that have been characterized by persistent supply surplus and high visible stocks.
It’s just that the lead surplus has been smaller than the zinc surplus and it is showing signs of narrowing faster.
The latest assessment by the International Lead and Zinc Study Group (ILZSG) is that the global refined zinc market recorded a supply-demand surplus of 265,000 tons in 2012, bringing the cumulative surplus to 1.555 million tons since 2007.
The assessed surplus of lead last year, by contrast, was just 64,000 tons and the cumulative surplus over the same six-year time-frame was just 253,000 tons.
Unsurprisingly given this backdrop, LME stocks of both metals are high by historical standards but in both cases inventory levels in outright terms are less important than the distribution of that inventory.
The largest concentrations of both metals are in “problem” locations such as Antwerp, New Orleans, Detroit and Johor, all characterized by load-out queues at trader-operated warehouses.
Both are operating to the same template as aluminum. There’s a lot of the stuff around but getting it out of the LME system is a different matter.
And on paper at least, it looks like it will be the lead market that will first need to tap exchange inventory.
ILZSG figures suggest that the global refined lead market moved into modest (4,400-ton) deficit over the second half of 2012. Zinc, on the other hand, simply notched up more surplus to the tune of 91,800 tons.
That divergent trend is expected to continue this year.
In the January Reuters poll of analysts the median expectation was for the zinc market to record another hefty 180,000-ton surplus this year but for lead to record a highly marginal surplus of 6,500 tons.
All of which helps explain why lead has been trading at a significant premium to its ugly sister and why it is expected to continue doing so until further notice.
It’s the degree of out-performance that is in question, though.
The lead market benefitted from a combination of seasonal and one-off factors over the closing stages of 2012.
Lead usage is highly leveraged to battery demand, both new and replacement, and battery-makers tend to stock up ahead of the battery-kill season that is the Northern Hemisphere winter.
When they did last year, though, they encountered a surprisingly tight market, deriving from the previous year’s mild winter and resulting low scrap generation rates. Things were not helped by outages at a number of primary smelters.
Nyrstar’s Port Pirie smelter in Australia experienced what the company termed “an unplanned shut” in the third quarter, with full-year 2012 production dropping sharply to 158,000 tons from 195,000 tons in 2011.
Bulgaria’s smelter went bankrupt last year and all lead production at the plant ceased in April, removing about 20,000 tons from the market.
There are also persistent rumors about the status of the Zellidja smelter in Morocco, albeit none confirmed at this moment in time. All of which helps explain the sharp spike in scrap battery prices and refined lead premiums over the fourth quarter of 2012.
Now, though, Northern Hemisphere winter is almost behind us and replacement battery demand should move down a gear or two over the next couple of months.
Smelter outages are being replaced by restarts, most notably Glencore’s Portovesme smelter in Sardinia.
The company hasn’t so far officially confirmed the restart of the 80,000-ton-per year facility but the word on the street is that it was switched back on in February with first bullion already shipped to the neighboring San Gavino refinery.
Another resurrection from the dead is the La Oroya smelter in Peru. Zinc production restarted around the middle of last year with lead production expected to follow, although Peru Mining Ministry figures show no attributable output through December.
As seasonal demand drivers ebb and lost smelter capacity is replaced, physical premiums in Europe at least are starting to retreat from the panic levels of late last year in what should be seen as an early-warning sign for the LME lead price.
— Andy Home is a Reuters market analyst.
The views expressed are his own.
Another warning sign is coming out of China, which is the key driver of lead usage growth thanks to the combination of rising automotive output and the e-bike phenomenon, both important sources of demand for lead-acid batteries.
However, China is showing every sign of generating its own substantial and rising domestic lead surplus.
Stocks of lead registered with the Shanghai Futures Exchange (SHFE) have surged by 61,279 tons to a record-high of 136,260 tons since the start of January.
Identifying what exactly is going on in China is tricky but this sudden flood of metal seems to reflect better recycling rates, as the first wave of e-bikes hits the scrap yards, and the lifting of the environmental crack-down on the lead production sector by central authorities.
This surplus metal is, for now at least, quarantined from the international market-place by China’s export duty but continued surplus may seep out in forms of the metal that don’t make it into the headline trade figures.
None of which is to say that lead is still not more of an attractive bull narrative than zinc, just that in this particularly ugly contest, lead’s recent bullish glow may flatter to deceive.