Lead price falls despite tight supply

The anticipated fallout of US-China trade war has been dragging the price since June

Prices of most base metals have cooled in recent months. Lead is no exception. Until early 2018, international lead prices on the London Metal Exchange (LME) had showed an increasing trend, moving from a multi-year low of $1,600 per tonne in early 2016 to $2,500 a tonne by October 2017, and to $2,600 a tonne in early 2018.

However, since then, lead prices have been on a decline, coming down to the current rate of $2,000. Much of this fall, though, has happened only since June. In India, MCX (Multi Commodity Exchange) spot prices have mirrored international trends in the above periods. Domestic lead prices stand at about ₹140 a kg now, down from the ₹170-a-kg levels seen at the beginning of this year.

What drove prices

A major reason for the recent price decline is the anticipated fallout of the trade war between the US and China, on the Chinese as well as the global economy. China is the biggest consumer of lead, accounting for about 40 per cent of the global lead usage. Apprehensions that the trade war could slowdown industrial activity in China have been running high. In the past two years, China’s focus on infrastructure projects has pushed up demand for industrial metals including lead. Besides, the growing popularity of three-wheeled e-trikes in China which use lead-acid batteries, has also triggered huge demand for lead in that geography.

The fact that the trade war could have its ripple effects on the global economy, and, hence, hit demand for base metals, has also played a role in bringing down international prices in the past 2-3 months.

However, fundamentally, on the demand-supply side, things are only favourable for the metal.

Data from the International Lead and Zinc Study Group (ILZSG) indicate that global demand for refined lead metal exceeded supply by 1.65 lakh tonnes in 2017, much higher than the initial expectations of a shortage of 1.25 lakh tonnes.

According to ILZSG, decline in mine output across Australia, the US and China triggered the gap. After falling 32.6 per cent in 2016, Australian lead mine output declined by a further 22.2 per cent in 2017. Output fell 10.4 per cent in the US and 0.9 per cent in China. These reductions were sharper than the rise in mine production seen in Bolivia, India, Kazakhstan and Turkey.

Thus, overall global lead mine output fell 0.9 per cent in 2017 (over 2016), coming in at 47.49 lakh tonnes, against the originally expected 50.6 lakh tonnes. Consequently, refined lead metal production came in at 113.2 lakh tonnes in 2017, showing only a marginal 0.7 per cent increase over 2016. It was initially expected at 115.8 lakh tonnes.

Excess demand over supply saw stocks being liquidated in 2017. Inventories reported by LME, Shanghai Futures Exchange, producers and consumers decreased by 40,000 tonnes as of December-end 2017. These factors had kept lead prices red hot until the beginning of this year.

Outlook

While the trade war has currently dampened prices, the tight supply conditions could cause lead prices to move up again. For the first half of this calendar year, provisional data available with ILZSG indicate that world refined lead metal demand has already exceeded supply by 39,000 tonnes.

In the outlook for the full year 2018 released in April , ILZSG expects global demand for refined lead metal to rise 2.7 per cent over 2017 to 11.90 million (119 lakh) tonnes. Usage is forecast to grow over 3 per cent in China and the US, and 2.1 per cent in Europe.

On the production side, world refined lead metal output is expected to increase 3.8 per cent to 11.88 million (118.8 lakh) tonnes in 2018. Output is forecast to rise 4.7 per cent in China, 10 per cent in the US, 13.7 per cent in Australia, and 1.6 per cent in Europe.

Demand is expected to exceed supply by 17,000 tonnes in 2018. Hence, if the trends continue on estimated lines, lead prices may not move further south.

However, a clearer picture, after taking into account the impact of the trade war, will be available once ILZSG releases its second forecast for 2018 in October-end.

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