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COLUMN-Lead market tightens on Chinese and U.S. import appetite: Andy Home
November 27, 2017 / 2:17 PM / 16 days ago

COLUMN-Lead market tightens on Chinese and U.S. import appetite: Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters)

* China's Refined Lead Trade: tmsnrt.rs/2A8QmoN

By Andy Home

LONDON, Nov 27 (Reuters) - The International Lead and Zinc Study Group (ILZSG) last month made a significant revision to its outlook for the lead market this year.

The market is now expected to be in a supply deficit of around 125,000 tonnes ahead of another 48,000-tonne deficit next year.

When the Group’s statistical committee last convened in April, it forecast a balanced market this year.

What has happened to change its collective mind?

Two things, it turns out.

Firstly, China has been importing refined lead in quantities not seen since 2009. Indeed, lead has been something of a surprise bull stand-out in China’s base metals import picture this year.

But China’s pull on units from the rest of the world is currently being eclipsed by an even bigger flow of lead to the United States.

The causes of both are rooted in the secondary part of the lead supply chain, which is where things get very opaque indeed.

That is why lead can spring surprises on even the statistical experts.

Graphic on China’s trade in refined lead:

tmsnrt.rs/2A8QmoN

CHINA IMPORTING LIKE ITS 2009

China imported 75,700 tonnes of refined lead in the first 10 months of this year after being a net exporter over the previous four years.

Most of it has come from Australia (39,000 tonnes) and Kazakhstan (25,000 tonnes), although October also brought 2,432 tonnes from Italy, the first significant imports from that country since 2009.

That year, one of collapsing Western demand and Chinese stimulus, is the only historical benchmark for this magnitude of import appetite. Total imports in 2009 were 157,000 tonnes. Cumulative exports in the last four years, by contrast, have totalled 119,000 tonnes.

This dramatic shift in trade flow seems strange, given the ILZSG’s figures show China’s domestic lead production rising by over 12 percent so far this year.

The Group’s partial explanation for such a sudden jump in imports is rising use of three-wheeled e-trikes, which still use a lead-acid battery. That, it suggests, has offset a loss of market share to lithium-ion batteries in the e-bike market.

But there is almost certainly a piece missing from the Chinese lead jigsaw.

What the official figures can’t capture is the closure of “illegal” capacity in China because it was never officially counted in the first place.

China’s lead supply chain has seen periodic environmental clampdowns in recent years but this year’s inspections, according to state metals researcher Antaike, have been the “most severe (...) in history”.

Official supply chains have been disrupted. Unofficial supply chains, particularly those secondary operators using scrap as feed, have been closed.

The same theme has been playing out across the industrial metals spectrum in China, often with counterintuitive statistical outcomes.

The steel sector, for example, has seen millions of tonnes of capacity closures but with no apparent impact on official production, which has actually grown.

This statistical quirk is down to official production expanding to fill the gap left by the closure of unofficial production, which operated off Beijing’s statistical radar.

Something similar could well be at work with China’s lead production figures.

It remains to be seen how long this import trend continues. Since no-one really saw it coming, there’s no consensus on how long it might last.

Visible stocks registered with the Shanghai Futures Exchange (ShFE) have been rising since the middle of September but at 34,442 tonnes are still low in outright terms. There were over 80,000 tonnes in exchange warehouses as recently as May this year.

Meanwhile, all imports of lead concentrates from North Korea have now been halted as part of China’s commitment to international sanctions.

The country was China’s fourth largest supplier of lead raw materials last year and its loss will prove difficult to replace in an already tight concentrates sector.

U.S. IMPORTS UP, PRODUCTION DOWN

U.S. imports of refined lead surged by over 100,000 tonnes to 458,000 tonnes in the first eight months of this year from 351,000 tonnes in the same period of 2016, according to the ILZSG.

Here there is greater statistical clarity as to what is going on.

A cut in production at a secondary producer called Quemetco in California has seen national output slide by 72,000 tonnes over the January-September period, according to ILZSG figures.

The Group is forecasting U.S. refined lead production to fall by 11 percent this year with a resulting increase in imports “in particular from Mexico and the Republic of Korea”.

Except who knew Quemetco had partially closed its 120,000-tonne per year City of Industry plant?

It’s a recycler of lead-acid batteries and part of the privately-owned ECOBAT group of companies, meaning no public disclosure requirements and therefore no news flow.

Had the ILZSG not explicitly referenced Quemetco’s loss of production in its latest forecast, the plant’s operating status would have been unknown outside of the small exclusive club that is the lead scrap market.

NO TIGHTNESS IN LONDON?

Lead’s opacity as a market is in large part down to the high proportion of it sourced from secondary materials, a notoriously dark part of all metals supply chains.

These two drivers of the ILZSG’s new deficit forecast have been building momentum in the shadows.

In the light that is the London Metal Exchange (LME), recent arrivals of lead at official warehouses have undermined any narrative of market tightness.

But it’s worth noting that headline stocks have been steadily edging lower and at 145,100 tonnes are down by 50,000 tonnes on the start of the year and the lowest they’ve been since December 2015.

Moreover, on-warrant stocks of 99,100 tonnes are closely held, one entity controlling between 40 and 50 percent, according to exchange data <0#LME-WHL>.

So far the LME lead market appears relaxed.

Time-spreads are trading in small contango, while the outright price is currently doing little more than shuffling sideways in a $2,450-2,500 range.

Nothing very much appears to be happening.

But that’s often the way with lead.

Key fundamental shifts tend to be obscured in the physical, particularly scrap, market shadows. When they do manifest themselves in a lit trading venue such as the LME, they often come as a surprise because no-one saw them coming.

This year is shaping up to be a year of double surprise, but has anyone actually told the LME lead market yet?

Editing by David Evans

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