LONDON – Seasonally strong demand from battery makers, tight supplies caused by mine shutdowns and dwindling inventories in London Metal Exchange warehouses are expected to sustain lead prices, which recently hit six-year highs.
Benchmark lead on the London Metal Exchange at around $2 500/t is up about 25% so far in 2017. Much of that gain came in the second half of this year as the prospect of a large deficit came into view.
"Winter in the Northern Hemisphere is 'battery kill' season for automotive replacements. Car battery manufacturers start preparing stocks in September," said Farid Ahmed, lead analyst at consultants Wood Mackenzie.
More than 80% of global lead consumption – at around 11-million tonnes this year – goes towards batteries mainly for autos, demand for which has risen sharply in countries such as China due to growing affluence.
"The supply crunch has been looming for a couple of years," Ahmed said, adding that he expects the lead market to see a deficit of 131 000 t this year and 105 000 t in 2018.
Lead is mined alongside zinc. Closures of major mines such as Century in Australia and Lisheen in Ireland and cutbacks by miners such as Glencore have left the market short of both metals.
Between 2014 and 2016 mined lead supply shrank by roughly 500 000 t, or 10% of the global total, analysts say.
Additionally, an expectation that lead usage will plummet due to stronger demand for electric vehicles, which use lithium-ion rather than lead-acid batteries is premature.
"We see the market share of EVs rising as battery costs fall and charging infrastructure improves, but this is going to be a gradual process, with the major impact on lead arriving post-2020," ICBC Standard Bank analysts said in a note.
"Furthermore, while hybrids continue to play a significant role, there will still be demand for lead-acid batteries."
The biggest supply shortfall over coming months is seen in top consumer China due to an environmental crackdown on polluting industries.
Additionally, China's imports of lead concentrate from North Korea have tumbled due to new sanctions imposed on Pyongyang by the United Nations as punishment for missile tests in July.
Shortages of concentrate have seen treatment charges – the fees that smelters charge to turn ore into metal – plunge.
"Supply constraints are pretty visible," said Societe Generale analyst Robin Bhar. "If you are looking for a seasonal play, lead would be number one, maybe getting a demand boost from a colder winter than people expected."
The LME's positioning report shows funds' net long positioning hit 24 557 lots or more than 600 000 t on December 1, its highest since the exchange started publishing the data.
Also a concern for consumers are dwindling stocks in LME registered warehouses, which at 145 500 t are down from above 190 000 t in March. Nervousness is reinforced by cancelled warrants or material earmarked for delivery at above 30% of the total.