China pollution crackdown, sliding inventories hit lead market

[February 06, 2019]  By Eric Onstad

LONDON (Reuters) - Lead prices may get a boost as environmental crackdowns on smelters in China curb output in the world's biggest market for the battery metal as inventories tumble.

A record-breaking cold blast in United States could deepen potential shortages, creating a spike in demand as drivers scramble to replace batteries damaged by the big freeze.

Benchmark lead prices on the London Metal Exchange have gained around 4 percent this year after sliding 18.8 percent in 2018, its biggest annual loss since 2011.

Lead inventories in warehouses registered with the LME have slid by a third over the past month to the lowest levels since April 2009, while metal stored in Chinese non-exchange depots have tumbled by 70 percent.

Two years of weaker mine output have resulted in global market deficits, with the gap mainly made up by inventories, but these are now running very low, said Farid Ahmed, lead analyst at consultancy Wood Mackenzie.

Inventories cover just over one week of global lead demand.

"There's not a lot of lead around. We could see some fireworks in the next several months, there could be an acute squeeze," Ahmed said.

A clampdown on polluting smelters in China has resulted in a significant proportion of smelters idle or operating at reduced rates, he added.

Last year, primary lead output in China fell 2.3 percent. While secondary, or recycled, lead production increased by 5.9 percent and offset that decline, this year the authorities are launching a crackdown on illegal lead battery recycling.

The recent U.S. cold snap could also exacerbate the situation. "We note that 40 percent of auto battery demand arises from replacement – which tends to peak in the winter months as battery failures increase," Robin Bhar, head of metals research at Societe Generale, said in a note.

The shutdowns have helped spur a sharp rise in Chinese imports of refined lead.

But after the major erosion of LME stocks, what's left in LME warehouses is old, low quality metal that is largely not suitable for Chinese battery makers.

"You've got this big China pull, really extreme China tightness at the moment, but there's a very big quality deferential between the metal that's attracted into China and most of the metal that's left on the LME." said Oliver Nugent, analyst at Citibank in London.

Mine production is due to recover this year, but there is a lag as unprocessed ore works its way through the value chain into refined metal and therefore will not help the market in the next few months, analysts said.

The International Lead and Zinc Study Group forecast that lead mine supply is due to increase this year by 4.1 percent to 4.77 million tonnes after falling 0.4 percent in 2018.

Any squeeze should be temporary, since mine supply is due to continue to increase, leading to a global surplus of 106,000 tonnes by 2020 and 109,000 tonnes the following year, according to Citibank.

(Reporting by Eric Onstad; editing by David Evans)

[© 2019 Thomson Reuters. All rights reserved.]

Copyright 2019 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.  Thompson Reuters is solely responsible for this content.