Shortages flip zinc to premium over lead

LONDON (Reuters) - The zinc price has pushed above its sister metal lead for the first time since November and is likely to remain ascendant in coming months as speculators step up zinc buying on forecasts of shortages while lead is hit by a seasonal slump.

Zinc dross, used in the production of galvanized steel, is seen at a workshop of the Novolipetsk (NLMK) steel mill in Lipetsk, about 500 km (311 miles) southeast of the capital Moscow, January 30, 2014. Picture taken January 30, 2014. REUTERS/Andrey Kuzmin (RUSSIA - Tags: BUSINESS INDUSTRIAL COMMODITIES)

Prices of the two metals, usually found in the same mines, are often used as the basis for trading strategies using either the spread or the ratio.

“Zinc should remain more expensive than lead and there are good reasons for it,” said analyst Daniel Briesemann at Commerzbank in Frankfurt.

“The zinc market should be much tighter this year and in following years compared to the lead market.”

The price relationship of the two metals has swiftly reversed as investors have latched on to a bullish story in zinc.

Benchmark zinc prices on the London Metal Exchange have rallied by a fifth to about $1,740 a tonne since touching 6-1/2 year lows in mid-January while lead has lagged.

That has meant that zinc, largely used for galvanizing steel, has moved to a $20 a tonne premium to lead, flipping from trading at a discount of $145 early last week.

Lead is mainly used to make batteries.

The move marks the first time that zinc has been more expensive than lead since November, when speculators were dumping zinc as shortages failed to materialize.

The closure of major zinc mines, however, such as Vedanta’s Lisheen and MMG’s Century is now having a concrete impact, creating shortages of zinc concentrate, semi-processed ore used by smelters.

Seasonal dynamics will also favor zinc over lead in coming months.

“As we come out of the first quarter and get into the second quarter, the weather warms up and building construction activity increases so that favors zinc,” said Robin Bhar, head of metals research at Societe Generale.

“The weather doesn’t favor lead because battery buying should start to fade.”

The winter is high season for battery replacement since extreme cold weather typically causes failures. Batteries account for about 80 percent of lead demand.

“If the dynamics continue, especially for zinc, we could easily see a much higher premium for zinc in the near future,” said Briesemann.

He declined to forecast how far the spread could widen, but last year it surged to a peak of $340 in favor of zinc.

Reporting by Eric Onstad; editing by Susan Thomas