LONDON (Reuters) - The outage of Nyrstar’s Port Pirie lead smelter in Australia has injected a rare bit of excitement into the London lead market.
London Metal Exchange (LME) three-month lead rose to a one-month high of $1,918.50 per tonne as news filtered into the market on June 6.
That was mild relative to the reaction in LME time-spreads, which contracted to their tightest levels in two years, suggesting a scramble to realign positions.
The Belgian company, which is in the midst of a capital restructuring that will cede control to trade house Trafigura, has declared force majeure on deliveries from Port Pirie. It hopes to have the smelter back up and running by the end of this month.
Trafigura and the broader lead market can only hope that Nyrstar meets that time-line, since this supply hit has served to expose an underlying tightness in metal availability that has been masked by recent price weakness.
LME lead has been on the back foot since late February, when it recorded its year-to-date high of $2,179.50 per tonne. The slide bottomed out at $1,773.50 in the middle of last month but with little upside impetus until the Port Pirie news.
All the LME-traded base metals have been under selling pressure as macroeconomic fears override individual market dynamics but lead has been the weakest performer of all.
That’s in large part due to its supporting role in the ever-popular relative-value trade with “sister” metal zinc. If funds trade lead at all, it is to sell it while buying zinc.
The resulting dead weight on the lead price helps explain the modest reaction in outright price to the Port Pirie outage.
The real impact has been manifest in time-spreads, which started moving sharply on June 5 and have been volatile ever since.
The benchmark cash-to-three-months spread closed the prior week valued at a benign contango of $10.50 per tonne. By the close of June 5 it had flipped to a punishing backwardation of $39.00. As of Tuesday’s close, the cash premium had widened further to $42.50, which is the tightest it’s been since the first quarter of 2017.
“Tom-next”, the shortest-dated spread in the LME system and a good indicator of cash-date tightness, registered a backwardation of $19.00 per tonne on June 5 and as of this morning was still trading at a $9.00 backwardation.
These dramatic moves imply significant realignment of short-dated short positions.
LME broker Marex Spectron estimates speculative players were running collective short positions equivalent to 27% of open interest at the end of May. This has been slashed to 10.6% as of Monday.
As shorts scrambled to cover, they ran into a dominant long position with stock and cash positions representing over 80% of available exchange inventory.
The resulting positions clash is still playing out.
The dominant long has since reduced to “just” 50-80% of LME stocks, according to the latest exchange report, but the size of its presence still speaks to just how little inventory is currently sitting in exchange warehouses.
Lead stocks have been steadily eroding for two years. There have been sporadic flurries of arrivals in the LME system but not enough to stop the headline figure touching a fresh 10-year low of 66,525 tonnes last week.
Availability is being constrained by the steady flow of metal into the Chinese market.
China switched from net exporter to net importer in 2017 and it has continued to suck in units from the rest of the world ever since. The net intake last year was 102,000 tonnes and cumulative imports in the first four months of this year accelerated again to 55,000 tonnes.
Yet there is no obvious corresponding build of refined lead in China. Stocks registered with the Shanghai Futures Exchange (ShFE) currently stand at 29,491 tonnes, up 13,665 tonnes on the start of January but still desperately low by historical standards.
In this respect, lead is simply mirroring the tightness in zinc, unsurprisingly since they tend to be found in the same deposits, meaning that lead has experienced the same raw materials squeeze as its sister metal.
Both will transition to a state of supply surplus, lead faster than zinc, according to the International Lead and Zinc Study Group.
But these things take time as zinc bears have found out to their cost this year. Lead bears are now learning the same lesson.
Much now depends on the rehabilitation work at the Port Pirie smelter in South Australia.
Nyrstar has been redeveloping the smelter to treat a wider mix of inputs and reduce the plant’s environmental impact.
Production last year slid to 160,000 tonnes from 171,000 tonnes in 2017 and 187,000 tonnes in 2016, partly due to this ongoing project work and partly due to a maintenance shutdown in December of last year to hit mandated air-quality targets.
The implied cost of the outage will therefore be in the order of 15,000 tonnes, assuming that Nyrstar can get the plant back up and running by the end of this month.
That may still be something of an ask, given that one of the furnaces needs “a partial dig out” of “solidified metal”, according to Nyrstar.
There will be, it conceded, “a material negative impact on production”. And on deliveries to customers, many of them located in southeast Asia.
Fifteen thousand tonnes doesn’t sound like a lot of lost metal but in the context of the lead market it is, particularly in terms of primary lead, which plays a dominant role in pricing even though half of global lead production comes from recycling.
The moves in LME spreads attest to just how significant this outage is in the context of a supply chain that is only starting to recover from two consecutive years of production shortfall.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Mark Potter