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COLUMN-U.S. lead market adjusts to life after "Herky": Andy Home
March 13, 2014 / 2:50 PM / in 4 years

COLUMN-U.S. lead market adjusts to life after "Herky": Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Andy Home

LONDON, March 13 (Reuters) - The last primary lead smelter in the United States, one sourcing its raw material from mines as opposed to scrap, closed at the end of 2013.

The shuttering of Herculaneum in the town of the same name was a historic moment, bringing the curtain down on 120 years of lead smelting in Missouri.

Doe Run, which operated the plant, will continue mining lead for export, producing refined lead from used batteries at its Boss recycling plant in the same state and, for a while at least, will keep the refining and alloying operations at Herculaneum open.

In the global scheme of things the closure of what locals affectionately call “Herky” will not make a lot of difference.

But it will make a big difference to U.S. lead market dynamics, increasing the country’s import dependence.

It also raises interesting questions as to what sort of pricing mechanism best suits a country that produces only secondary lead from recycled batteries.

THE LONG RETREAT

The first lead smelter at Herculaneum was built in 1892 by the St Joseph Lead Company to treat raw materials from the Missouri lead mines, which had already been in operation for several decades.

That was, in the end, the reason the smelter had to close, although a host of on-line commentators associated with the National Rifle Association (NRA) lobby might disagree.

“Entirely domestic manufacture of conventional ammunition, from raw ore to finished cartridge will be impossible”, lamented the “AmmoLand” website (“Last U.S. lead smelter to close, ammunition manufacturing to feel effects,” Oct. 29, 2013)

“The effect on the right to bear arms is obvious”, fumed Joe Wolverton in an article for the New American, going on to warn that “without ammunition, a gun is just a club”. (“EPA closure of last lead smelting plant to impact ammunition production,” Nov. 6, 2013).

NRA members can rest assured. Their rifles will still be able to fire bullets. All the major U.S. ammunition manufacturers already source their lead from recycled materials.

It was 120 years of continuous lead smelting, not a back-door attack on the gun lobby, that determined “Herky‘s” fate.

The Environmental Protection Agency (EPA) has been intensely involved in the Herculaneum site for over 10 years and the original agreement to close the smelter was reached in 2010.

Doe Run experimented with a new electrowinning production process but decided over a year ago that the costs of building a full-scale commercial plant were too high.

True, the U.S. has the world’s toughest ambient air quality standards for lead emissions, but it is hardly the only country that has a problem with production of the toxic metal.

In Australia the Magellan mine, now renamed the Paroo Station mine, has spent half of its eight-year life in mothballs because of environmental concerns. And it wasn’t even smelting the stuff.

The closure of Herculaneum is simply part of a long retreat from primary lead production across the developed world.

IMPORT DEPENDENCE

The world still needs lead for use in automotive batteries but demand is increasingly met through recycling old batteries. Lead has the highest recycling rate of any of the industrial metals.

In the United States secondary lead plants, including Doe Run’s own, produced almost 1.2 million tonnes of refined metal last year, according to figures from the International Lead and Zinc Study Group (ILZSG).

That’s not enough to satisfy demand in what is the world’s second largest user of the metal after China.

The shortfall is met by imports, which have historically come mainly from Canada and Mexico. Clearly, that import dependence is only going to increase with the loss of the 120,000-tonne per year Herculaneum smelter.

Indeed, import flows last year experienced a step-change, possibly reflecting, at least in part, pre-emptive stock-building. ******************************************************* Graphic on U.S. trade in refined lead: link.reuters.com/mer57v *******************************************************

U.S. imports of refined lead rose to 503,000 tonnes in 2013 from 352,000 tonnes in 2012, according to ILZSG figures.

Analysts at Barclays Capital, writing in December, estimated there had been an off-exchange build of around 50,000 tonnes in lead stocks outside of China in the first three quarters of 2013, “with the majority coming in the U.S.” (“Lead: Solving the off-warrant conundrum”, Dec 13, 2013).

What is self-evident is that if there are stocks of lead in the United States, they are not in the London Metal Exchange (LME) warehouse system.

LME-registered inventory in the country totals just 2,175 tonnes, split between 1,500 tonnes at Detroit and 675 tonnes at Los Angeles.

Off-market stocks may provide some cushioning against Herculaneum’s closure but last year’s increased imports are probably an early taster of what to expect going forwards. To the point that U.S. buyers may have to search further afield for refined lead units than the two traditional neighbouring suppliers.

IN THE LOOP

That means that even as U.S. lead production becomes exclusively scrap-derived in nature, the domestic market will remain umbilically attached to the international refined lead market.

And to the international lead price set by the LME.

But for the many operators working within what is a closed-loop battery supply chain, the “world” price risks becoming ever less relevant.

For them the most powerful price driver is the availability of used batteries, not supply-demand fluctuations in the primary lead market.

A new form of pricing is starting to evolve, most visibly in the form of a battery scrap reference price as assessed by Platts, a leading global energy, metals and petrochemicals information provider.

Launched late 2012 in response to demand from domestic players, its evolution to date underlines that different dynamic, as shown in the next graphic. ******************************************************* Graphic on LME lead price and Platts battery scrap price: link.reuters.com/nar57v *******************************************************

This price series is still in its infancy and, of course, does not offer the same price risk hedging function as a market such as the LME.

But its very existence hints at a splintering of lead pricing in the U.S. market, a possible first step towards a hybrid pricing model with those players exposed to imports pricing on the “world” primary price and those locked in the closed-loop secondary market pricing on a “domestic” battery price.

It’s far too early to say how these trends will evolve but it’s all part of life after “Herky” for one of the world’s largest lead users. (Editing by Anthony Barker)

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