LONDON (Reuters) - China imported 128,000 tonnes of refined lead last year, bringing the two-year cumulative total to 206,000 tonnes.
The only precedent for this pace of import was 2009, when China soaked up 157,000 tonnes of refined lead.
It’s a problematic comparison though, given lead prices and arbitrage were distorted back then by the global financial crisis and Beijing’s resulting rush to support its own producers.
The import surge dried up in 2010 and China became a net exporter of refined lead to the rest of the world over the 2013-2016 period.
The scale of imports since then is a clear sign there is a real physical shortfall in China, normally the sort of narrative to excite metals bulls.
This being lead, however, you’d be hard pushed to discern even the faintest flicker of bullish enthusiasm in either the Shanghai or London futures markets.
The London Metal Exchange (LME) lead contract is currently stable, but as long as China’s appetite remains this strong, there could yet be a bull storm brewing.
China is both the largest producer and consumer of lead, as is the case with many industrial metals.
Lead’s dominant usage in automotive batteries leaves it exposed to the downturn in China’s automotive sector. Automobile sales dropped another 15.8 percent in January, marking the seventh straight month of decline in the world’s largest auto market.
However, weak demand is being offset by even weaker production, China’s internal supply of lead suffering a double blow over the last couple of years.
Secondary production, using scrap lead as an input, is a major component of Chinese supply as it is everywhere else.
It’s a sector that has come in for Beijing’s “structural reform” treatment with smaller operators being squeezed out in favour of more modern, larger plants using new technology to comply with increasingly tough emissions standards.
The reform process will provide structure to a previously fragmented industry but it comes at the short-term cost of supply chain disruption.
Primary producers, those turning mined concentrates into refined lead, have not been spared the rolling environmental clamp-down taking place across China’s industrial landscape.
But they have also had to face declining availability of concentrates, both domestic and imported.
The International Lead and Zinc Group (ILZSG) estimates that China’s mined lead production fell by 3.4 percent last year, the second straight year of contraction.
Mine production in the rest of the world grew by only a marginal 0.7 percent and the resulting tightness has taken its toll on China’s concentrates imports.
These have fallen for three consecutive years. The bulk weight total was 1.23 million tonnes last year, down by 35 percent, or 672,000 tonnes, on 2015.
Tightness in the raw materials section of the supply chain has travelled to the refined metal sector in China, with production, primary and secondary combined, falling by 1 percent last year, according to ILZSG.
Visible inventory in China remains low with Shanghai Futures Exchange (ShFE) stocks totalling just 29,355 tonnes at the end of last week.
There has been a small rebuild over the last couple of months but it has been insignificant relative to the tonnage being imported.
Low ShFE stocks may also reflect the current lack of trading interest in the Shanghai lead contract.
Prices have done no more than shuffle sideways since the second quarter of 2018 and open interest touched a three-year low in January, from which it has barely recovered.
Similarly in London, where LME three-month lead is the second-weakest performer in the base metals pack so far this year, opening up a wide discount of over $600 per tonne to sister metal zinc.
Zinc is back on investors’ radar thanks to rapidly declining LME stocks and a realisation that more mine supply does not automatically mean more refined metal supply if there is a smelter bottle-neck.
LME lead stocks, by comparison, have failed to transmit such a tradeable signal.
At a headline level of 76,725 tonnes stocks are historically low and are down by 30,650 tonnes on the start of January.
However, any clear-cut pattern has been broken by a slightly bewildering sequence of cancellations, reverse cancellations and “arrivals”.
LME lead stocks have a history of such ambiguity, much of which is down to the fact that what’s left in the LME warehouse system is increasingly old metal.
Mass cancellations have often been followed by mass “arrivals” because physical buyers have baulked at the technical specifications of the metal, leaving the owner little choice but to place it back on LME warrant.
Such stocks rotation, driven by warrant sifting, has been a defining feature of the LME lead market for several years but the resulting “noise” doesn’t help any coherent market narrative.
ILZSG estimates the global refined lead market recorded a supply-usage deficit of 98,000 tonnes last year, following a 148,000-tonne shortfall in 2017.
The cumulative deficit has, on paper, been large enough to absorb the preceding years of surplus and cause a significant drawdown in off-market, statistically invisible stocks.
In this regard, lead’s fundamentals look similar to those of zinc, not entirely surprising given that most of the world’s lead concentrates come as a by-product from zinc mining.
As with zinc, the consensus has been that a new wave of mines will reinvigorate a depleted supply chain and push the global market into surplus.
The zinc market seems to be currently reassessing this scenario as new mine supply fails to translate fully into improved metal availability.
To date there has been no such reassessment of the lead market.
ILZSG’s most recent forecast, in October last year, was for a switch to a 50,000-tonne surplus this year.
But in April last year it was projecting a minimal refined market deficit of 17,000 tonnes in 2018.
It dramatically revised that forecast in October, factoring in China’s increased imports, a key statistical component for calculating Chinese market balance.
On current trends, ILZSG may have to revise this year’s balance again at its spring meeting.
China’s lead imports in January were 25,800 tonnes, exceeding the total amount of metal imported between 2011 and 2016.
If they carry on at this pace, even the somnolent lead market might start noticing.
The opinions expressed here are those of the author, a columnist for Reuters.
(Editing by Emelia Sithole-Matarise)