The Hindu Business Line : Lead prices set to dip further on excess supply

Output is likely to increase due to the commissioning of new plants in China followed by increased production in Canada, India, Japan, Poland, the UK and Russia

Suresh P. Iyengar

Mumbai, Aug. 21 Continuing its downtrend, lead prices is set to fall further in the third quarter of the calendar year due to excess supply and waning demand.

Support from quake

In the second quarter of 2008, the average lead prices on London Metal Exchange (LME) was $2,330 a tonne, 19.6 per cent lower than the average price in first quarter of this year.

Prices did find some support mid-May after the earthquake at Sichuan in China, the major exporter. China exported just 23,000 tonnes between January and May 2008 compared to 1.16 lakh tonnes in the same period last year.

In July, prices rose to $2,294 a tonne on fear of lower production in China and subsequent fall in its exports. Small smelters reduced the output by 10 per cent to ease power shortage in China, the world’s largest producer of lead.

According to Shanghai Nonferrous Metals Trade Association, China’s largest lead producer Henan Yuguang Gold and Lead Co and others have agreed to reduce production until September. Moreover, South Korea plans to triple its base metal reserve lent some support to the lead prices, as the country consumes nearly four per cent of the total world output. However, high inventories capped the possible upside movement in prices.

Production & inventory

Output is likely to increase due to the commissioning of new plants in China followed by increased production in Canada, India, Japan, Poland, the UK and Russia. Production of refined lead has grown 5 per cent CAGR (Compound Annual Growth Rate) in the last five years. The total production in 2008 is expected to increase to 8.53 million tonnes from 8.1 million logged in last year.

Stockpiles monitored by the LME moved to a 24-month high of 1.02 lakh tonnes in Q2 2008. The bearish sentiment in the overall lead market, led prices down to as low as $1,531 a tonne to steep rise in production.

Between January and May, global production of refined lead metal rose 3.9 per cent 3.501 million tonne, mainly due to higher output in China, India, the UK and the US.

In the same period, mine production in Bolivia and China grew substantially resulting in a rise in global output of lead by 8.4 per cent. The global supply of refined lead metal will marginally exceed demand by 37,000 tonnes in 2008.

Demand

Consumption of the metal recorded an increase of 3.2 per cent to 3.47 million tonnes, and was primarily driven by higher demand in China and the US which partly offset the fall in demand from Europe, the Republic of Korea, Taiwan and Turkey. In the first five months of 2008, global lead market was in surplus by 31,000 tonnes.

Automobile battery manufacturers are among the major lead consumer. With the global economy witnessing a marked slowdown, the demand from automobile sector is likely to taper off.

The demand for refined lead this year in Europe is expected to decline by 2 per cent, while it may remain flat in the US. However, a strong demand from China, India, Japan and Korea may drive the overall global consumption to 8.49 million tonnes.

Price trend

Presently prices are supported by the slower decline in stockpiles and higher cancelled warrants ratio, suggesting improvement in demand in the spot market. The market has already discounted the output cuts in China due to power shortage, which may end September.

However, given the price slump this year, many small miners may opt to cut down production as slump in prices will adversely affect their margins. Any such event will have a positive impact on lead prices.