LONDON (Reuters) - Zinc and lead are both in short supply on the London Metal Exchange (LME).
Headline zinc stocks of 53,875 tonnes are back at April levels, while “live” tonnage of 27,800 tonnes is the lowest it’s been in at least 20 years.
Lead stocks are a little higher at 70,075 tonnes but have failed significantly to rebuild from July’s decade low of 55,475 tonnes.
Unsurprisingly, both LME contracts are experiencing time-spread tightness.
Zinc closed last week with cash metal commanding a $61-per tonne premium over metal for three-month delivery. Lead’s front-month curve structure is also in backwardation to the tune of $7.25 at Friday’s close.
The sister metals have defied expectations of a shift into supply surplus throughout this year and they continue to do so.
Even though both are seeing flagging demand, particularly from the automotive sector, supply bottlenecks have kept each market in supply deficit this year, according to the International Lead and Zinc Study Group (ILZSG).
Indeed, ILZSG has just widened its expected 2019 zinc supply deficit to 178,000 tonnes from an assessment of 121,000 tonnes at the Group’s last meeting in May.
That’s despite a downgrade to demand, which is now expected to decline by 0.1%, largely due to weakness in Europe, where usage is forecast to contract by 3.7% this year.
Supply, though, just hasn’t come through in the way anticipated at the start of the year.
Back in May the Group was looking for world mine production to surge by 6.2% this year, laying the ground for a 3.6% increase in refined metal output.
Those forecasts have been slashed to just 2.0% and 2.5% respectively.
Mine supply has increased as expected in Australia, but the impact has been offset by sharp declines of 6.4% in Peru and 7.8% in the United States.
The anticipated rise in refined production has only really played out in China, where output is expected to lift by 7.1% this year.
Outside of China, smelter hits have caused a bottleneck in the supply chain.
European production will fall by 3.5% this year due to lower output at Nyrstar’s plants in France and the Netherlands, while the permanent closure of the 100,000-tonne per year Vladikavkaz smelter in Russia has blown a lasting hole in regional capacity.
A string of smaller smelter outages will also depress output in Australia, India and Canada, the ILZSG said.
The Group’s revisions to its May forecasts for the lead market are even more dramatic.
The global refined market was expected to register a supply-usage surplus of 71,000 tonnes this year but that has just been revised to a shortfall of 46,000 tonnes.
Lead too is expected to see a fall in demand this year, led by a 1.1% decline in China, which is seeing weakness in automotive production and “increased use of lithium-ion batteries in both the motorcycle and e-bike sectors and for Uninterruptable Power Supply (UPS) stationary backup systems,” according to ILZSG.
However, lead supply has misfired even more than zinc with the Group now forecasting global refined production to contract by 0.3% this year, compared with an expectation in May that it would grow by 2.5%.
The main culprit is Nyrstar’s Port Pirie lead smelter in Australia. The plant went down in May and following a restart was out of action again in August.
Canada’s Belledune smelter has also seen production hit by industrial action, while Glencore’s permanent closure of its Palpala plant in Argentina last year has served to reduce Latin American treatment capacity.
While events this year confounded a market narrative of zinc and lead transitioning from supply deficit to surplus, ILZSG’s forecasts suggest the shift has simply been delayed not cancelled.
The Group is forecasting a zinc market surplus of 192,000 tonnes and a lead market surplus of 55,000 tonnes in 2020.
This year’s demand weakness is expected to fade with expectations that zinc usage will increase by 0.9% and lead by 0.8% next year.
But the delayed supply surge is expected finally to arrive with full impact next year.
Zinc mined and refined supply are forecast to rise by 4.7% and 3.7% respectively with lead mine supply up 3.9% and refined output up 1.7%.
This year’s smelter bottlenecks are expected largely to clear next year, although Port Pirie’s technical travails remain a key variable for lead’s supply chain.
Both zinc and lead prices have spent much of 2019 on the back foot with the market trading the elusive surplus story.
It’s only in the last couple of weeks that there’s been something of a collective double-take, primarily because visible exchange stocks have shown no sign of rebuilding.
LME three-month lead last week hit a year-to-date high of $2,265 per tonne, although it has since been knocked back to a current $2,160.
Zinc, meanwhile, has regained a toe-hold above the $2,500-per tonne level for the first time since June, currently trading around $2,530.
Further gains seem unlikely given the broader negativity in the industrial metals complex with traders eyeing the bearish combination of spreading factory weakness and the continued absence of any breakthrough in the Sino-U.S. trade dispute.
Rather, the tensions between expectation and reality are likely to continue playing out in the nearby time-spreads.
Zinc is particularly in focus, given the extremely low levels of LME on-warrant stocks, but a dominant position in the LME lead contract equivalent to over 90% of available inventory is also worth a keeping a close eye on.
It’s clear that consecutive years of deficit in both markets have severely depleted inventory, both on and off exchange, and that it will take time for the supply chain to refill.
The time-line for a return to surplus has already proved more elastic than anyone expected at the start of 2019. The latest numbers from ILZSG should serve as a warning that it could be a while yet before the transition becomes tangible in the form of rising exchange stocks.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Susan Fenton