Could 2020 market trends bring new lustre to gloomy lead market?

2020 will see lead transition into a market surplus after several years of significant deficit, according to Wood Mackenzie.

Despite total exchange stocks of refined metal remaining near historical lows, softening demand has damaged sentiment.

The extent to which weaker consumption, particularly in the automotive sector, will be offset by supply shortfalls and smelter bottlenecks is key to lead’s performance this year.

Realignment of focus by some Asian smelters may place serious pressure on refined lead availability in North America, thus impacting the American battery industry and the electrification of transport.

What are the biggest trends to watch in the global lead market in 2020? Farid Ahmed, Wood Mackenzie Principal Analyst, and Giles Lloyd, Wood Mackenzie Principal Analyst, see five key themes:

• Automotive demand in the slow lane
• Lead mine production stagnating
• Lead smelter bottleneck emerging
• Changes in the SHFE-LME lead price arbitrage
• Threat of tight lead supply and rising premiums for the US

Demand for automotive batteries is crucial for refined lead consumption in 2020, according to Wood Mackenzie.

Ahmed said: “This sector experienced a global slow-down in 2019 and pressure will persist this year in the key markets of China and the US.

“Original equipment (OE) battery production contracted in both the US and China last year, which together now manufacture over 40% of the world’s motor vehicles. Global OE demand shrank last year, with China down 8% and the US down 14%. Global OE demand is forecast to revert to growth of 1.2% this year but with US OE almost flat and Chinese OE down again this year by 1.6%.

“India is a key emerging market, with total demand forecast to rise by 5.6% in 2020 – a relatively healthy increase but well down on the average 8% a year in the past decade. However, we expect Indian OE automotive battery consumption to grow by 3.1% in 2020 – much lower than the 7.4% a year average of the past decade.

“The global vehicle industry will grow in 2020 by the same amount as last year - about 2.4%. But the slowing growth rate of new car production enhances the importance of the replacement sector, which is more than three times larger than OE in terms of lead consumption. This is particularly true for China, as the previously meteoric growth in vehicle ownership slows, its automotive market matures and existing cars require new batteries.

“Our current forecast is for a 2.3% increase in global automotive lead consumption. However, there are still many unresolved variables capable of influencing this.”

Wood Mackenzie does not foresee any significant additions to mined lead supply in 2020.

“The largest additions are expected to be at the Mexican Peñasquito and the Kazakh Zhairem mines. However, can we be confident that even these largest additions will materialise? After all, Peñasquito had been expected to produce 90 kt Pb more in 2019 due to higher head grades but operational difficulties, including shutdowns due to blockades of the mine site, are estimated to have limited the increase to just 13 kt Pb. Could further losses materialise in 2020?

“Meanwhile, Glencore's production guidance no longer includes lead and so our forecast increase in its own-sourced lead production is more uncertain this year. With mined lead supply forecast to rise only modestly against a backdrop of relatively low levels of concentrate and refined stocks, any unusually severe disruption would likely put renewed downward pressure on treatment charges (TCs) and upward pressure on refined prices,” said Lloyd.

China is close to being self-sufficient in refined lead, only occasionally having to import in recent years. Prolonged outages at the Australian Port Pirie smelter and subsequent closure of the Canadian Brunswick smelter resulted in refined supply tightness being felt more keenly outside China

“These losses came on top of several earlier smelter cutbacks relative to nameplate capacity, with low TCs and smelter revenues - resulting from lead concentrate market tightness - discouraging smelters from seeking enough lead concentrate to operate fully.

“Further disruption at Port Pirie is an obvious risk, particularly now that Brunswick is permanently closed and the refined market is already tightest outside China. The future of the German Nordenham smelter is also still uncertain.

“TCs for non-concentrate feed will no doubt rise in response to higher TCs for concentrate to remain competitive. In fact, TCs for non-concentrate feed may have to rise by more as they cannot be placed in China, like concentrate, because they are considered "wastes".

“Any displacement of non-concentrate feed also risks putting downward pressure on the higher TCs that encouraged it. However, if the alternative is a substantial ROW smelter bottleneck, TCs for concentrate must rise substantially,” added Lloyd.

Tracking lead mine production, particularly in China, and nameplate capacity utilisation in the short term is difficult.

“We must look to other signals to determine whether lead mine production is evolving as we expect,” said Lloyd. “If mined lead supply falls notably short of what we are forecasting, we would expect higher refined lead prices.

“To the extent that mine supply is the constraint on metal market availability, both SHFE and LME prices would rise to ration metal supply and/or encourage extra lead mine supply. With a backdrop of excess zinc mine supply, lead prices must also encourage those zinc mines with significant by-product lead to continue operating.”

The interaction between SHFE and LME prices - the arbitrage - also provides useful signals for investors.

“The SHFE-LME arbitrage has been strongly negative for China's imports of refined lead since Port Pirie's first unplanned outage, although the absence of VAT rebates means that the arbitrage is not yet positive for China's exports of refined lead. An increasingly negative arbitrage for China's imports of refined lead would indicate that global smelters, excluding China, are failing to utilise their capacity to the extent that we are forecasting. China introducing an export duty would be further evidence of a Rest of World (ROW) smelter bottleneck.

“Although the SHFE-LME arbitrage is unlikely to be the mechanism through which China is encouraged to export refined lead to meet in ROW smelter supply, it is the mechanism through which ROW smelters will find it easier to compete for lead concentrate.

“Strengthening LME lead prices relative to SHFE lead prices will make it more expensive for Chinese smelters to import concentrate. As we have already witnessed, this contributes to upward pressure on TCs. Increasing TCs, coupled with strengthening LME prices, will encourage ROW smelters to take steps to raise their utilisation of nameplate capacity.

“This could include attempts to maximise the flow of scrap batteries to secondary smelters so that capacity can be freed up at primary lead smelters,” said Lloyd.

A potential tightening of refined lead supply looms over the US market for 2020, says Wood Mackenzie.

“Last year saw a significant year-on-year decline in US consumption, easing its lead deficit to about 400 kt. But the substantial drop in US demand over that period meant that imports, as a proportion of total consumption, were almost unchanged. Wood Mackenzie expects supply to start tightening up as the year unfolds.

“Korea, a major exporter of refined lead to the US, is not expected to increase this supply in 2020. Instead, Korean producers are increasing focus on the emerging local markets in South East Asia.

“Compounding the problem for the US is that it is haemorrhaging lead scrap – the key raw material for America’s lead industry. Mexico is the principal destination for these used batteries but Korea has been increasing imports by an average of 13% a year over the past decade, including a 78% jump in 2019. The US market lost over 500 kt of contained lead in scrap last year to just the four leading recipients: Mexico; Korea; Canada; and India. This represents one-third of its total annual consumption,” said Ahmed.