Column: Another year of lead surplus but not for everybody

5 minute read

A worker adjusts machinery used to extract lead and zinc from ore at a smelter owned by Lumbung Mineral Sentosa in Bogor regency south of Jakarta July 19, 2014. REUTERS/Darren Whiteside/File Photo

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LONDON, May 20 (Reuters) - The global refined lead market is on course to register a fourth consecutive year of supply surplus, according to the International Lead and Zinc Study Group (ILZSG).

The surplus will shrink from 69,000 tonnes last year to a marginal 17,000 tonnes this year, the Group said in its twice-yearly statistical snapshot of lead's fundamental picture.

Expectations of yet more excess metal help explain why lead is once again an under-performer in the London Metal Exchange (LME) base metals suite, three-month metal sinking to a one-year low of $2,025 per tonne on Thursday.

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However, the seemingly staid statistical landscape masks a stark regional divergence.

For physical buyers in both the United States and Europe the last year has been characterised by shortage not surfeit of lead.

Western supply gaps have been plugged by China, which has become a major exporter of refined lead for the first time in over a decade.

The fundamental split in the global lead supply chain between eastern surplus and western shortfall looks set to widen further this year.

Refined lead market balance estimates from International Lead and Zinc Study Group

WESTERN SUPPLY STRESS

Global refined lead output growth will slow from 3.2% in 2021 to 1.3% this year, according to ILZSG.

Higher production "will be mainly influenced by rises in China, India, Kazakhstan and Mexico," it said.European production, by contrast, "is expected to fall principally as a result of reductions in Bulgaria, Germany, Italy, Poland, the Russian Federation and Ukraine."

While Germany's Stolberg smelter is expected to restart soon after a year's outage due to flood damage, the war in Ukraine and associated rise in European power costs is taking a rising toll on other regional producers.

Moreover, Russian lead is now sanctioned by the European Union, which tightens the screws further on regional availability.

Russia exported 127,000 tonnes of unwrought lead last year, including 15,000 tonnes to Germany, 13,000 tonnes to Turkey and 5,500 tonnes to the Czech Republic, according to the International Trade Centre.

Russian exports also made it as far as the United States, which imported 6,500 tonnes of Russian metal last year.

That attests to the tightness in the U.S. market-place following the unexpected early 2021 closure of the Florence recycling plant in South Carolina. The shutdown was the main reason why U.S. lead production fell by 4% to 990,000 tonnes in 2021, according to the United States Geological Survey.

U.S. buyers have been paying eye-watering physical premiums to get hold of metal ever since. Fastmarkets currently assesses the duty-paid premium for 99.7% lead ingot in the Midwest at 19.5 cents/lb ($430 per tonne) over LME cash, a new record high.

China's imports and exports of primary lead

EXPORTS REBALANCE POLARISED MARKET

The regional contrasts in availability are also clear to see in the distribution of exchange stocks.

LME inventory stands at a depleted 38,850 tonnes, down by 29% since the start of January and by 62% from this time last year, when stocks were over 100,000 tonnes.

Almost all the remaining metal is in Asia. European locations hold just 3,750 tonnes of lead and U.S. locations zero. LME off-warrant shadow stocks were a meager 872 tonnes at the end of March, again all of it bar 19 tonnes stored at Asian locations.

LME shortage is matched by Chinese plenty. Stocks of lead registered with the Shanghai Futures Exchange currently total 90,650 tonnes, up by 4,267 tonnes on the start of January.

They would be higher still were China not now regularly exporting metal to the rest of the world.

Outbound shipments totalled 95,000 tonnes last year, the highest since 2007, the year before the imposition of a 10% export tax on refined metal which stifled export flows over the last decade.

That changed around the middle of last year when soaring physical premiums in Europe and the United States opened a favourable export opportunity even factoring in the duty.

The export flow continued unabated in the first quarter of this year with another 38,000 tonnes of refined lead leaving China.

The breakdown of export destinations is a telling indication of where supply stresses are most acute. Shipments over the last six reported months have included 37,000 tonnes to the United States, 22,000 tonnes to the Netherlands and 15,000 tonnes to Turkey.

A FINE MARGIN

These rebalancing flows from east to west look set to continue.

It's clear that very little of the 280,000 tonne surplus ILZSG estimates has built over the last four years is located in either Europe or the United States.

With European production expected to slide further and Russian supply now unavailable, the call on Asian metal will remain strong.

ILZSG is forecasting global demand growth to slow from 4.0% to 1.7% this year with supply-chain problems in the automotive sector dampening demand for lead-acid batteries.

Replacement batteries are non-cyclical, however, which will underpin lead usage even if broader manufacturing impetus fades.

Rather, it is supply, particularly European supply, that is the wild card in lead pricing this year.

ILZSG's forecast 17,000-tonne surplus is a fine-margin call in a 12-million-tonne market-place characterised by such geographically divergent fundamental dynamics.

And it's worth noting that the Group's initial estimate for the first quarter of the year was a global market deficit of 23,000 tonnes, compared with a surplus of 5,000 tonnes in the same period of 2021.

Global surplus could yet prove elusive and many Western buyers will be dependent on Chinese exports if they're to see any of it at all.

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

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Editing by Kirsten Donovan

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