February 13, 2020: Market research group Wood Mackenzie announced February 4 its opinions on the trends to watch in the 2020 global lead market.
The report covers lead’s transition into a market surplus after several years of deficit, focusing on five key themes affecting the market: slow automotive demand, stagnating lead mine production, an emerging lead smelter bottleneck, changes in the SHFE-LME lead price arbitrage, and the threat of tight lead supply and rising premiums in the US.
The key to lead’s performance this year may be the extent to which weaker consumption in the automotive sector is offset by supply shortfalls and smelter bottlenecks.
Farid Ahmed, Wood Mackenzie principal analyst, said: “This sector experienced a global slow-down in 2019 and pressure will persist this year in the key markets of China and the US… Our current forecast is for a 2.3% increase in global automotive lead consumption. However, there are still many unresolved variables capable of influencing this.”
Reporting on uncertainties in mine production, Giles Lloyd, Wood Mackenzie principal analyst said: “The largest additions are expected to be at the Mexican Peñasquito and the Kazakh Zhairem mines. However, operational difficulties, including shutdowns due to blockades of the mine site, are estimated to have limited production.
“Meanwhile, Glencore’s production guidance no longer includes lead and so our forecast increase in its own-sourced lead production is more uncertain this year.”
Outside of China, where the industry is close to self-sufficiency in refined lead, supply tightness is being felt due to prolonged outages, cutbacks and closures.
Lloyd added: “These losses came on top of several earlier smelter cutbacks relative to nameplate capacity, with low TCs and smelter revenues — resulting from lead concentrate market tightness — discouraging smelters from seeking enough lead concentrate to operate fully.
“Further disruption at Australia’s Port Pirie smelter is an obvious risk, particularly now that Canada’s Brunswick smelter is permanently closed and the refined market is already tightest outside China. The future of the German Nordenham smelter is also still uncertain.”
Tracking lead mine production in the short term is difficult, and investors must look to other signals to determine whether lead mine production is evolving as expected.
Investors sometimes look to the arbitrage — the interaction between SHFE and LME prices — for useful information.
“An increasingly negative arbitrage for China’s imports of refined lead would indicate that global smelters, excluding China, are failing to utilise their capacity to the extent that we are forecasting. China introducing an export duty would be further evidence of a Rest of World (ROW) smelter bottleneck.
“Strengthening LME lead prices relative to SHFE lead prices will make it more expensive for Chinese smelters to import concentrate. As we have already witnessed, this contributes to upward pressure on TCs,” said Lloyd.
Wood Mackenzie reports a potential tightening of refined lead supply in the US market in 2020.
Ahmed said: “Last year saw a significant year-on-year decline in US consumption, easing its lead deficit to about 400 kt. But the substantial drop in US demand over that period meant that imports, as a proportion of total consumption, were almost unchanged.
”Wood Mackenzie expects supply to start tightening up as the year unfolds.
“Compounding the problem for the US is that it is haemorrhaging lead scrap — the key raw material for America’s lead industry. Mexico is the principal destination for these used batteries but Korea has been increasing imports by an average of 13% a year over the past decade, including a 78% jump in 2019. The US market lost over 500 kt of contained lead in scrap last year to just four recipients: Mexico; Korea; Canada; and India.
“This represents one-third of its total annual consumption.”