Column: Unloved prospect can join Bloomberg Commodity’s A-list: Andy Home
LONDON, Nov 2 (Reuters) – Lead will become the 24th commodity to be included in the Bloomberg Commodity Index (BCOM), joining its London Metal Exchange (LME) counterparts aluminum, copper, nickel and zinc.
Three-month lead prices in London jumped nearly 10% to $2,019.50 a tonne on Friday’s news, although it has since pared gains to $1,965 currently.
The reaction is understandable if a bit premature. Although lead will only have a weighting of 0.936% in the index, the lowest of all base metals, this will still translate into fund buying early next year as asset managers will adapt to the new weightings.
Perhaps equally important is what the inclusion says about a widely assumed metal heading towards obsolescence as lead-acid batteries succumb to the relentless march of lithium-powered electric vehicles (EVs).
The frequent reports of lead death, however, continue to be greatly exaggerated.
LEAD IS NOT DEAD
It’s not easy being a senior market analyst.
“One of the frustrations … is people are constantly telling you lead is dead,” said Andrew Thomas, director of zinc and lead at Wood Mackenzie.
However, as he explained at the research house’s LME Week seminar, what everyone forgets is that of the 80 million passenger vehicles produced last year, “nearly everyone had lead acid battery”.
And that includes the eight million electric vehicles produced. In the excitement over new battery metals such as lithium and cobalt, it’s easy to overlook the fact that electric vehicles have a backup lead-acid battery for safety systems and to power systems. in-car entertainment.
Lead acid batteries need to be replaced every few years. Given an average vehicle lifespan of 13 to 14 years, last year’s 80 million vehicles will still need replacement batteries early in the next decade.
The lead usage profile is one of unexciting but steady growth, driven by the need to meet the demand for replacement batteries in an ever-growing global passenger fleet.
Supply has risen to match demand, with global production of refined lead rising from less than 10 million tonnes in 2010 to 12.38 million tonnes last year, according to the International Lead Study Group and zinc (ILZSG).
BCOM looks at five-year averages of exchange liquidity and production data to determine which products are included and at what weighting.
The idea is that the commodities selected should be both important to the global economy and reflect the value placed on this role by financial markets.
Global lead production has grown enough over the past five years to warrant inclusion even as trading liquidity has declined, according to a Bloomberg release.
BCOM determines base metals liquidity by reference to the LME lead contract, which saw volumes fall 3.8% last year with a further decline of 7.7% in the first nine months of this year.
The performance of lead should be seen in the context of a 4.7% drop in total LME volumes last year and the broader decline in activity following the nickel explosion of the exchange in March of this year.
However, the weakness in trading activity also reflects the unloved status of lead relative to zinc, a twin metal. LME zinc volumes are more than double those of lead, even though global refined zinc production was only slightly higher at 13.85 million tonnes last year.
With demand for replacement batteries accounting for about half of global lead use each year, and recycled metal accounting for about 60% of supply, the market dynamics for lead are quite different from other industrial metals.
Batteries fail in boom times and in poor condition, which means lead is partially insulated from the economic cycle and has a history of shallower troughs but lower peaks than other LME metals.
The lead market, in other words, can be a bit boring.
But not right now. Ironically, it’s going through a turbulent period just as it’s about to be elevated to A-list commodity status.
An unusual sequence of smelter disruptions will cause global refined output to fall 0.3% in 2022, according to ILZSG, which expected a 1.3% rise as recently as April.
European supply has been hit by the year-long outage due to flooding at the German Stolberg plant, the loss of Russian imports due to sanctions and, more recently, the closure of secondary capacity in Italy.
The ILZSG also noted lower production in North America, Turkey, South Korea and Australia, where scheduled maintenance work at Nyrstar’s Port Pirie smelter will halt production for two months in the fourth quarter.
The Group now forecasts a global supply shortfall of 83,000 tonnes this year and another 42,000 tonnes in 2023 before smelters catch up with demand.
LME stocks are very low at 27,625 tonnes, equivalent to less than a day’s worth of global consumption. This is fueling the tension spread over time, with the metal’s three-month cash premium easing to $48.50 a tonne last month, the widest it has been this year.
Physical premiums are at record highs, with Fastmarkets pricing this for delivery in the US Midwest at 22.5 cents per pound ($496 per tonne) above the LME spot price.
The Western deficit is made up by Chinese exports. China has been a constant net importer over the period 2017-2020, but became a net exporter last year at 93,000 tonnes. Net exports for the first nine months of this year have already almost exceeded this figure at 92,000 tons.
The flow of Chinese metal is expected to continue until supply and demand rebalance in Western markets.
These are turbulent times for a normally dormant advance and create an interesting backdrop for fund buying following January’s reweighting.
This purchase will also coincide with winter in the northern hemisphere, a peak season for lead demand, as cold weather makes batteries more prone to failure.
It’s just another distinctive metal quirk that refuses to go away.
The battery metal no one wants to talk about: October 17, 2019
The opinions expressed here are those of the author, columnist for Reuters.
Editing by Jane Merriman
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