Add lead to the list of struggling commodities that may soon see higher prices.
Prices for the heavy metal have been moving sideways for much of 2016. Lead prices are up 5 percent, compared to 3 percent for a broad commodities index. But lead prices look to play catch-up with better-performing metals in coming months.
What lead is used for
Lead (chemical element Pb) is highly corrosion resistant, making it ideal for use in batteries. In fact, batteries account for more than 80 percent of its end use. Lead-acid batteries are the main type of batteries used in automobiles. They’re also widely used by hospitals and in other public buildings as a back-up power supply. Batteries used in computers also contain a lot of lead.
Lead is also resistant to radiation, which makes it useful in hospitals, dental surgery, laboratories and nuclear installations. (It is also apparently impervious to Superman’s x-ray vision.)
Lead also has undesirable properties. Excessive quantities of it can cause blood poisoning, and there is an ongoing effort to rid the world of lead-based paint, and leaded gasoline.
Lead can be recycled very effectively – which is called secondary production. When lead is fully recycled, it keeps almost all of its useful properties. More lead is produced from recycling than from mining. In fact, 95 percent of the lead used in batteries has been recycled.
In North America, 70 percent of lead production is from secondary production; in Western Europe, 60 percent. The more industrialised the country, the more recycled lead is used.
On the other hand, the world’s top lead producer, China, produces most of its lead from mining lead ore. China accounted for 50 percent of the world’s 4.6 million tonnes of lead mining production last year. Australia was in second place at 14 percent. China also consumes about 45 percent of the world’s lead.
What’s been happening with lead prices
Between 2011 and 2015, lead prices fell by over 50 percent. But in 2015, it was the “best of the worst” among industrial metals. Lead prices fell just 2.8 percent in 2015, while zinc, nickel, copper and tin all lost over 20 percent. 2015 was a disastrous year for almost every commodity.
So far this year, lead has traded in a range between US$1570 and US$1960 per metric tonne.
Lead is often mentioned in the same breath as zinc. That’s because the two metals tend to be mined from the same ores. Since February, zinc has traded at a premium to lead. And this premium has widened since then.
While zinc has rallied 43 percent this year, lead has only gained 10 percent. This helped zinc’s premium over lead last month reach its highest level since 2007 – nearly US$500 per metric tonne. It’s slipped to around US$400 per metric tonne since then.
Lead supply and demand
Zinc prices have done better than lead prices because the supply/demand equation for zinc has been more favourable. For lead, though, production has outstripped demand. According to the International Lead and Zinc Study Group (ILZSG), there was a 37,000 tonne surplus in the global refined lead market during the first half of 2016. This helped keep lead prices down when other metals were rallying.
This surplus has been shrinking in recent months, though. In June, there was even a small deficit. According to economic research consultants Capital Economics, 2016 will end with the lead market having a deficit for the year. And when there is more demand than supply, prices climb – lead reached US$1938 a tonne last week, its highest level in 14 months.
Falling supply from the world’s biggest producer will boost prices
As mentioned, China is the world’s largest lead producer and consumer. In August, China ordered the closure of all of the lead and zinc mines in Hunan province, the country’s main production zone for both metals.
According to the government, it shut down the mines to implement reforms to improve the mines’ overall safety levels. The shutdowns will last until at least June 2017. It will reportedly do the same thing for lead mines in at least seven other provinces.
This will likely result in a significant decline in the amount of lead produced globally, even though no exact numbers are known yet. And it’s one of the main reasons many analysts believe that the lead market will flip from surplus to deficit by the end of the year.
Lead-acid batteries will continue to bolster demand
Lead demand normally rises during the winter season in top consumer countries China and the U.S. Winter is considered the “high season” for battery replacement, when the cold weather causes failures. And it may partly explain the metal’s strengthening price during the third quarter so far this year.
Over the long term, lead-acid battery demand from the automobile industry will also support lead prices. One global researcher forecasts that global vehicle sales will grow by 2.1 percent a year through 2020. In India alone, car sales will likely grow by 8 percent next year to almost 4 million vehicles. And the more cars sold, the higher the demand for lead-acid batteries.
Additionally, the lead-acid battery market in China is projected to grow by an annual compound growth rate of 5.6 percent between 2014 and 2019. So, despite the emergence of alternatives like lithium, the low cost and long lifespan of lead-acid batteries will keep demand high.
Storage levels help set lead prices. Current levels show that the lead market is tight at the moment. So, should there be a consistent lead deficit, the price of lead will rally.
How to invest in lead
It’s not easy for the individual investor to participate in the lead market. But one option is the iPath Dow Jones-UBS Lead Subindex Total Return ETN (New York Stock Exchange; ticker: LD). This tracks lead prices by owning lead futures contracts.
But with less than US$1 million in assets under management, it’s a very small fund and has low trading volumes. So be careful buying and selling it.