Column: Supply hits catch up with lead as LME stocks shrink: Andy Home

Nyrstar NV

11/10/2022 01:00

(Repeats Oct. 10 column without change)
    By Andy Home
       LONDON, Oct 10 (Reuters) - The lead market has sparked
back into life after a raid on already low London Metal Exchange
(LME) stocks. 
    The LME three-month lead price  CMPB3  jumped 12% over the
course of last week, hitting a near two-month high of $2,093.50
per tonne. Time-spreads are the tightest they've been this year,
the cash premium over three-month metal widening to $45.50 per
tonne. 
    The trigger for all the excitement was the cancellation of
17,125 tonnes of LME stocks in apparent preparation for physical
load-out. 
    This has left available stocks in the LME warehouse network
at just 10,900 tonnes, the lowest this century and equivalent to
a few hours worth of global consumption. 
    The stocks grab appeared to catch off-guard a market that
has been happy to short lead and buy zinc in a long-running
relative value trade between the sister metals. 
    Zinc smelter closures in Europe have grabbed the recent
headlines but lead supply has also been taking a growing number
of supply hits. 
    EUROPEAN SMELTER PROBLEMS
    Lead refiners are less exposed to Europe's rolling energy
crunch than zinc smelters. 
    Macquarie Bank estimates that lead refining uses around 800
kilowatt-hours per tonne of metal, compared with 4,750 for zinc.
("Commodities Compendium", Sep. 29, 2022).
    However, persistently high gas prices across Europe are now
starting to take their toll. 
    Ecobat Technologies  ECOBT.UL , the world's biggest lead
recycler, has this month suspended production at its Paderno and
Marcianise plants in Italy, taking out 80,000 tonnes of annual
supply. 
    The move reflects "extreme energy prices and other
excessively burdensome costs in Italy, which show no signs of
improvement", the company said.
    Glencore  GLEN.L  is reviewing the sustainability of its
lead operations at the Portovesme site, also in Italy, in light
of the sustained squeeze on margins. The sister zinc plant was
mothballed late last year. 
    Germany's Stolberg smelter, meanwhile, remains out of action
after being flooded last summer. Repairs are complete but
commodities group Trafigura is still awaiting regulatory
approval of its purchase of the plant to restart operations. 
    Stolberg's extended downtime has cost the European market
around 155,000 tonnes of lead supply since its closure a year
ago. 
    Supply-chain tightness has been further aggravated by the
European Union's April import ban on Russian metal. The country
exported 127,000 tonnes of refined lead last year with
significant flows going to Germany and Turkey. 
    GLOBAL OUTPUT FALLING
    Lead's supply problems are not confined to Europe. 
    Trafigura's metals arm Nyrstar  NYR.BR  also operates the
Port Pirie lead smelter in Australia, which is poised to close
for a 55-day maintenance overhaul.
    Chinese lead producers seem to be faring no better.
Operating rates at secondary recyclers have averaged only 41% so
far this year, down from 55% in 2022, according to Macquarie
Bank, citing a combination of reduced scrap supply and power
constraints. 
    Global refined lead output fell by 2.2% over the first seven
months of this year, according to the latest monthly assessment
from the International Lead and Zinc Study Group. 
    Usage also fell by almost 1%, meaning the global market was
still in a marginal 25,000-tonne supply surplus over
January-July but it's much reduced from the 116,000-tonne
production overhang in the year-ago period. 
    TIGHT MARKETS
    Physical buyers outside of China may struggle to find that
surplus. 
    The U.S. market has been super-tight since the unexpected
closure of the Florence recycling plant in South Carolina last
year. 
    Midwest physical premiums for high-purity lead surged from
11.75 to a record 20.5 cents per lb over 2021. They have crept
higher still since, Fastmarkets assessing the mid-point at 22.25
cents per lb, equivalent to $491 per tonne over the LME cash
price. 
    Indeed, so extreme has been the physical squeeze on metal in
the U.S. market that it has been receiving significant tonnages
from China for the first time since 2006. 
    China exported 36,000 tonnes to the United States last year
and another 30,000 tonnes in June this year. 
    That together with stubbornly high physical premiums,
suggests there is still little slack in the North American
supply chain. 
    RECESSION PROOF
    China has also been exporting refined lead to Taiwan, which
is the only LME location to have registered any arrivals in
recent months 
    The pipeline, however, looks to be running dry since Chinese
exports slowed to just 1,120 tonnes in August, most of it going
to Thailand, where there are no LME warehouses. 
    It's far from clear how there's going to be any rebuild in
LME warehouse stocks, given reduced flows from China and the
multiplying smelter problems outside of China. 
    Lead is exhibiting the same confused dynamics as sister
metal zinc, a darkening macro picture weighing on the outright
price even as both physical supply chain and LME market remain
tight. 
    There is one key difference, however, between the two
metals. Zinc demand is widely expected to plummet in the coming
months as Europe's manufacturing sector lurches into recession
and U.S. growth brakes sharply. 
    Lead's main end-use market, by contrast, is vehicle
batteries and 78% of that demand comes from replacement
batteries.
    This makes lead partially recession-proof. Batteries will
fail in good times and bad and when they fail not getting a new
one is not an option. 
    Recession may improve availability but not to the same
extent as other metals, which suggests that the LME lead market
may have to learn to live with super-low stocks for a while yet.
    The opinions expressed here are those of the author, a
columnist for Reuters
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Lead sparks back to life after LME stocks raid    https://tmsnrt.rs/3VhgSDm
US lead physical premiums high and still rising    https://tmsnrt.rs/3RNCMey
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by David Evans)
 ((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter
https://twitter.com/AndyHomeMetals))