Analysis: Investors, Chinese motorists to drive lead higher

LONDON Tue Dec 14, 2010 8:58am EST

LONDON (Reuters) - Demand for batteries from auto makers in emerging markets and investor interest in new exchange traded products in base metals are likely to drive lead prices higher next year, although exchange inventories are bulging.

Lead, now around $2,450 a tone, will rise to above $2,500 a tone on average, with some analysts saying it may even cross the $2,700 mark.

But the increase will not be as marked as for other base metals like copper, which is hitting record highs on supply worries.

"We still have very high inventories, there is still a huge oversupply of the market, there is a lot of new capacity coming onstream in China," Commerzbank analyst Daniel Briesemann said.

Lead stocks held around the world in warehouses of the London Metal Exchange (LME), are close to 10-1/2 year highs.

Demand for lead is steadier than that for most other base metals as about 40 to 50 percent is for replacement batteries, making it very resilient.

China's auto sector and rebounding production in Europe and North America have boosted demand for batteries this year.

However as scrappage schemes in Europe -- launched to help crisis-hit carmakers last year give sales a boost -- fade out, all eyes are on economies such as China, India and Brazil.

Vehicle sales in China could exceed 17 million units this year. Deutsche Bank sees that rising to some 20 million in 2011.

"Emerging market demand in consumer transport will be very important in driving lead demand in batteries," Deutsche Bank analyst Daniel Brebner said.

World lead usage is seen rising 4.5 percent this year to 9.02 million tones and by a further 5.8 percent next year to 9.55 million tones.

Lead on the LME is now nearly 60 percent higher since hitting its lowest this year at $1,535. Like other metals, it has climbed with help from a weaker dollar. But it has failed to match a 2010 peak of $2,690 hit in January, its highest since May 2008.

COLD SNAP

A cold snap in Britain has caused a surge in demand for replacement batteries in vehicles, car breakdown company RAC has said. Lead-acid batteries are more prone to failing in extreme weather so harsh conditions have raised expectations of a boost to lead demand.

"The unseasonably cold weather in North Western Europe is likely to see battery failures pick up relatively early this year," Citi said in a research note.

While the cold spell appears already to have led to a pick up in demand, with the metal being removed from warehouses in various locations, LME inventories at above 200,000 tones are still about five times higher than two years ago.

Investors are also focusing on exchange-traded products (ETP) or funds, with consumers worried they could divert metal away from the normal supply chain and distort prices.

ETF Securities launched the first physically-backed ETP for base metals last week, with copper, nickel and tin products. A physical lead ETP will be available next year.

"The launch of a lead ETF could allow investors greater access to that market," Brebner said.

The global lead market is forecast at a surplus of around 90,000 tones this year and next, according to the International Lead and Zinc Study Group. Some see it tightening further ahead.

"(Lead) doesn't have the huge excess inventories to work off that zinc and especially aluminum have, so that's why it looks better and the market should be in deficit by 2012," BNP Paribas analyst Stephen Briggs said. "But it's not going to be physically tight in the way copper and tin are going to be next year."

The Shanghai Futures Exchange is also likely to launch a lead contract in the second half of next year.

A lead contract in China, the world's top lead consumer and producer could increase arbitrage trade opportunities between Shanghai and the LME and boost investor interest in the metal.

"The impending introduction of the lead futures contract ... is likely to increase investor interest in lead in China, adding to price support on both the SHFE and LME," Societe Generale said in a note. It forecasts lead to average $2,775 next year.

Lead prices are already at levels where appetite for scrap metal is attracting criminals to strip lead roofs from Church of England buildings, sometimes using mapping system Google Earth to find targets.

About 8,000 insurance claims have been made for lead theft worth about 23 million pounds ($35.93 million) during the past three years, Church estates commissioner Tony Baldry said this month.

(Editing by Anthony Barker)

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