LONDON (Reuters) - Lead has been an unlikely and unforeseen beneficiary of the North Korea missile crisis.
A new round of U.N. sanctions includes North Korean exports of lead concentrate. China, which signed up to the U.S.-drafted resolution, will lose an increasingly significant flow of raw materials to its lead smelters.
The news has reinvigorated a market that had lost its bull narrative thread.
London Metal Exchange (LME) lead for three-months delivery hit a nine-month high of $2,537 per ton on Thursday morning.
Not as exciting as zinc, which has just surged to its highest level in over a decade. But being overshadowed by its more glamorous sister metal is nothing new for lead.
Characterized by a lack of statistical clarity and only sporadic news flow, lead tends to get regularly punished on the London market in the form of the popular relative value trade against zinc.
The sanctions news, however, has refocused attention on the state of China’s lead market. But is it tight or is it sufficiently well supplied to absorb the loss of North Korean material?
Graphic on China's imports of lead concentrate from North Korea: tmsnrt.rs/2fNLAVt
China imported 108,000 tonnes of lead concentrates from North Korea least year, making its neighbor the fourth largest supplier after the United States, Russia and Peru.
Imports in the first half of this year totaled 64,000 tonnes, making North Korea the second-largest supplier after Russia.
These figures, it should be emphasized, denote bulk tonnage, not metal contained. Judging by the implied value of North Korean imports, this seems to be relatively low-grade material, meaning lower metal content. The average implied price for North Korean imports in June was $800 per ton, compared with $1,965 for Peruvian material.
But North Korea is accounting for an ever-rising ratio of China’s total lead concentrate imports because the total figure has been trending steadily lower since the middle of 2015.
A tightening raw materials market mirrors zinc’s bull narrative for the very good reason that the two metals tend to be mined from the same deposits.
The zinc mine closures that have inflamed that metal’s bull spirits have also taken their toll on lead production. The International Lead and Zinc Group (ILZSG) estimates that mined production outside of China fell in both 2015 and 2016, albeit with a mild recovery in the first part of this year.
However, it’s what’s happening in China that divides opinions on the two metals’ relative price outlook.
Earlier this week China’s National Bureau of Statistics (NBS) reported that the country’s refined zinc production fell by 6 percent in June, providing yet another fillip for zinc’s bull run.
The numbers for lead, however, were if anything bearish, with national production rising by 6 percent.
The ILZSG estimates refined production in China rose by 13 percent in the first five months of this year, while mined production jumped by 23 percent to 1.14 million tonnes from 928,000 tonnes.
If these numbers are right, there’s nothing to see here for lead bulls. China would seem well capable of absorbing the loss of North Korean lead concentrates.
But are they right?
Chinese statistics on its metals sector can be opaque at the best of times, but when it comes to lead, we’re entering a particularly ill-lit place.
The country is host to a large number of small miners, many of them operating beyond the NBS’ statistical reach, meaning restricted visibility on what’s actually coming out of the ground.
The ILZSG’s different “apparent” calculations, meanwhile, can’t capture any changes in smelter stocks of concentrates.
If China’s lead smelters have drawn stocks to offset falling raw materials availability, the outcome of the ILZSG’s methodology would be a jump in “apparent” production.
Production could be up. Or stocks could be down. Or a bit of both. Confusing, isn’t it?
Try some different numbers, these ones from Thomson Reuters GFMS.
Analyst Wenyu Yao estimates that China’s mined production has risen by only a marginal two percent so far this year, while “primary lead production in the first seven months has decreased by 6.64 percent year-on-year in large part due to concentrate supply tightness”. (“Lead’s near-term fundamentals provide upside potential”, Aug. 16, 2017).
It’s this sort of statistical hall of mirrors that bedevils analysis of lead’s underlying supply and demand dynamics. And it’s why this market struggles to generate any coherent narrative.
So is China comfortably supplied with lead or short of the stuff?
Two harder bits of statistical evidence would seem to favor the latter interpretation.
The country has started importing refined lead in significant tonnages for the first time since 2009. Imports totaled 52,500 tonnes in the first half of the year, compared with just 135 tonnes in the same period of 2016.
Yet stocks of lead held by the Shanghai Futures Exchange have been steadily falling over the last couple of months.
At 49,121 tonnes as of last Friday, they are back at levels last seen in February.
Taken together with the GFMS production figures, the numerical jigsaw adds up to a picture of a tightening lead supply chain in China.
Taken with the official production numbers, the pieces of the jigsaw simply don’t fit and there is no picture at all.
While analysts ponder the Chinese jigsaw puzzle, the London market remains ambivalent about whether to buy back into a bull narrative that appeared to have unraveled.
LME lead was the bull stand-out among the base metals pack in January. That was because of a flurry of LME stocks activity with 43,425 tonnes canceled prior to physical load-out in the space of just four days.
The subsequent drawdowns of metal from LME warehouses, however, were offset by a steady trickle of arrivals which grew into a heavier flow in May. The net upshot is that LME stocks are down on the start of the year, but by a relatively modest 46,075 tonnes, or 24 percent.
And that despite increased imports both by China and the United States which, according to the ILZSG, imported 233,000 tonnes of refined lead in January-April, up from 164,000 tonnes in the year-ago period.
LME time-spreads, meanwhile, show no signs of incipient tightness at all.
Indeed, the benchmark cash-to-threes period last month eased out to $30 per ton contango, which is the most relaxed its been since the middle of 2014.
It’s another confusing part of the bigger lead puzzle.
The North Korean sanctions story has definitely rekindled interest in the market but the collective jury seems to remain out on whether China really is tightening.
More evidence will be needed to convince the skeptics. That evidence, however, is going to remain statistically problematic.
(The opinions expressed here are those of the author, a columnist for Reuters.)
Editing by David Evans