World lead prices have had a tepid run in the last many quarters. The broader commodity rally has left this base metal largely untouched because of a combination of factors — lack of liquidity in this relatively small market, little inclusion in passive indices and opacity of Chinese data. No wonder, lead continues to play second fiddle to more liquid LME contracts and this is primarily due to lack of data clarity.

On the face of it, the world lead market fundamentals look close to balance; yet, there are imponderables especially in terms of uncertainty relating to Chinese data. Market participants believe there is substantial unreported secondary production. China accounts for close to 50 per cent of both world refined lead production and consumption. Globally, on the supply side, the concentrate market is tight. Supplies are hit by mine closure, cutbacks and disruptions. However, nearly half of refined metal produced is from recycled material. As much of the supply comes from recycling, it dilutes the effect of concentrate squeeze. If anything, a price rise is sure to trigger more scrap into the market. The next generation of mines will come on line by 2018.

On the other hand, demand indicators are positive. The OEM market for lead-acid batteries, telecom industry utilisation for mobile communication station equipment and UPS industrial batteries all boost demand for this base metal. Demand for lead is strongly supported by the growth of automobile sales. According to some forecasts, by 2030, 94 per cent of the batteries in the world would be lead-acid batteries; and lead batteries would continue to be the major affordable source of instant energy.

So, there is general expectation of growth in world refined lead consumption. But the first three quarters of 2016 saw virtually zero growth. There have been regional variations in demand growth. For instance, European Union saw a 10 per cent demand growth on the back of a strong automotive sector.

The nagging question is whether the world lead market is in surplus or deficit. A close look at the supply-demand balance suggests the market will oscillate between small deficit and small surplus the next three years.

Finely balanced

For those wanting to take a forward position, here’s a note of caution. In commodities, it is axiomatic that when the market is finely balanced, even a small change in either demand or supply will usually exert a disproportionately large impact on prices. So, number crunching is critical.

With large production and consumption, Asian countries account for two-third of the world market. While China is undoubtedly the mover and shaker of the market, other origins and consumption regions include Europe and North America.

India is a minor player but Indian consumption is set to expand rapidly. According to the India Lead and Zinc Development Association, lead demand will double in the next 3-4 years. The battery industry will witness huge growth in the coming years in emerging applications like e-rickshaws, electric scooters, e-bikes as well as renewable energy (mainly solar) where massive investments are flowing in. While battery volumes are set to escalate, India would face the challenge of organised collection of used batteries and recycling them in an eco-friendly and energy-efficient manner. India will do well to study what China has done to tighten environmental regulations. “In future, consumers will be expecting lead batteries with high performance characteristics as well as upgraded quality levels,” asserts an ILZDA official.

Based on supply and demand outlook for the next two years, world refined lead prices have an upside potential. From an annual average of $1,830 a tonne in 2016, prices can rise upwards of 10 per cent in 2017 to an annual average of $2,070/t. In 2018, prices could potentially escalate by about 20 per cent to $2500/t. Like other base metals, lead will be driven by diverse factors including economic growth, geopolitical developments (with implication for crude oil prices), monetary policy, currency gyrations and labour action.

The writer is a global commodity specialist

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