(The opinions expressed here are those of the author, a columnist for Reuters.)
* Lead price and LME stocks: tmsnrt.rs/2E0McOt
By Andy Home
LONDON, Feb 5 (Reuters) - The price of lead traded on the London Metal Exchange (LME) hit $2,685 per tonne on Friday, its highest level since July 2011.
The intervening six years have seen the odd, brief flurry of action but much of the time it’s been pretty dull stuff.
Indeed, LME lead spent the best part of two whole years, 2013 and 2014, treading water in a $2,000-2,300 range.
This historic lack of excitement and lead’s opaque inner workings have left the battery material playing the role of ugly sister to more glamorous zinc in the ever-popular relative value trade between the two LME contracts.
But after a 23-percent rise in price last year and further gains in January, might 2018 be the year for lead to shine?
Analysts at Wood Mackenzie certainly think so, arguing that a slow-fuse tightening in the raw materials segment of the lead supply chain “will reach its zenith” this year, underpinning higher price levels. (“Lead: Five things to look for in 2018”, January 2018).
As ever with lead, though, the path to those sunny bull uplands may be only dimly lit.
Graphic on LME lead price and stocks:
Superficially, the story of lead’s tightening dynamics looks to be there for all to see in LME stocks developments.
Headline LME inventory fell by 52,675 tonnes, or 27 percent, last year and has slid another 11,000 tonnes over the course of January to a current 131,125 tonnes. That’s the lowest it’s been since December 2015.
Available tonnage, excluding metal earmarked for physical load-out, is just 77,525 tonnes, the lowest level since the middle of 2013.
Shrinking tonnage is complemented by tightening time-spreads.
The benchmark LME cash-to-three-months spread CMPB0-3 closed last week valued at a backwardation of $22.75, while the shortest-dated LME spread, “tom-next” CMPBT-0 has been flexing into backwardation with increasing regularity.
Both phenomena, falling available stocks and widening backwardation, reflect a spate of LME stock cancellations in the middle of January. A total 17,750 tonnes were taken off warrant in the space of four days, lifting the ratio of cancelled stocks in the LME warehouse system to more than 40 percent.
The only problem is that this type of stocks action has become almost an annual event in the LME lead market.
January 2017 brought 43,425 tonnes of cancellations, while December 2015 saw a massive 88,375 tonnes move into the LME’s cancelled stocks category.
Both events generated surges of bullish excitement, which subsequently dissipated as metal simply trickled back into the system over the ensuing months.
Shuffling LME stocks around to capitalise on low warehouse rent is how bored traders have passed the time during lead’s long dog days.
The net result is that LME stocks have been an extremely poor signal of what is happening “out there” beyond the visible exchange world.
And “out there” is where larger flows of refined lead have been taking place.
The first has been to China, which turned net importer of lead last year for the first time since 2012.
Imports totalled 78,150 tonnes in 2017, the highest annual total since 2009, a year of metallic turmoil following the financial crisis of 2008.
The cause of this rare pull on metal from the rest of the world is tightness in the mainland market occasioned by the closure of “illegal” secondary producers.
Since such operators were never included in any official production numbers, it’s a bit hard to say how much has been closed.
But evidently, the collective hit has been sufficiently large to cause a run on Shanghai Futures Exchange stocks and to suck in all those imports.
Note, by the way, that China’s imports last year comfortably exceeded the net drawdown in LME stocks, underlining the disconnect between what you see and what you don’t get to see in this market.
Even that unusual flow of metal into China, however, has been dwarfed by the amount of physical lead on the move to the United States.
Wood Mackenzie notes that U.S. imports were running at super-strong levels last year. The total for January-November was a record 508,000 tonnes, significantly more than the 412,000 tonnes imported in calendar 2016.
All lead production in the United States is secondary, using scrap as feed, after the demise of the last primary smelter, Herculaneum, in 2014.
And here, as in China, capacity has been closed.
One major recycler, Quemetco, has partly closed its 120,000-tonne per year City of Industry plant in California, prompting the International Lead and Zinc Study Group to forecast an 11-percent in U.S. production in 2017.
Imports are flowing into the country partly to fill this supply chain gap but also to capitalise on any potential infrastructure programme promised by President Trump.
As with the Chinese import flow, the U.S. import surge has been hard to discern from any changes in LME stocks.
With hits to secondary production taking place in both east and west, lead’s fortunes have become acutely sensitive to primary production of lead concentrates from mines.
And, according to Wood Mackenzie, there is simply not enough of the stuff around to feed global smelter demand, leading the research house to forecast a refined metal shortfall of 115,000 tonnes this year hot on the heels of a similar-sized 119,000 tonnes shortfall in 2017.
The key unknown is where this shortfall will appear.
It will depend on which smelters “choose to sacrifice volume” to support treatment charges, their core source of income.
If non-Chinese smelters take the hit, the supply gap will appear in the world outside of China, first and foremost the United States.
If non-Chinese smelters don’t reduce tonnage, there won’t be enough concentrates for Chinese smelters, translating into a new burst of import demand from that country.
This tug-of-war for raw materials between east and west could last a couple of years.
Wood Mackenzie is not expecting to “see the market move back into surplus until 2020.”
It is forecasting the lead price to average $2,450 per tonne this year after last year’s six-year high of $2,317 as this bullish cocktail plays out.
Last month’s action in LME lead stocks may be a sign of this supply tension moving from the non-visible to the exchange part of the market.
But given the number of false signals generated by LME lead stocks over the last few years, the real action may continue to take place in lead’s twilight zones. (Editing by Louise Heavens)