Tale of two lead markets likely to be less so in 2022 | LME Week 2021

By James Moore and Yasemin Esmen

Ambitious expansion of secondary lead capacity and strong tolling activity at Chinese smelters have driven a rapid increase of lead inventories in China. And SHFE warehouse stocks have surged to record levels, going above 200,000 tonnes this year.

High shipping costs and container shortages have kept this surplus locked in China at a time when rising seasonal demand and smelter disruptions have created tight availability elsewhere. This is clear from physical premiums in the US having risen to multi-year highs and lead stocks in the LME warehouse network having dropped to 12-year lows.

View the lead prices in this article

Looking ahead, our global supply-demand model implies the refined lead market fundamentals will gradually rebalance during 2022, after the modest surplus that accumulated in China this year. This rebalancing is premised on expectations of stronger demand from the automotive market (which has been negatively impacted by the semiconductor shortage that has forced automakers to cut production), and on easing tightness in the freight and shipping industry (which should resolve the regional availability disparity between the China and ex-China lead markets).

We also expect incremental improvements in mine supply in 2022 – which will support growth in primary refined lead production. High prices and capacity expansions have drawn heavily on scrap supplies, however. This could restrict activity by secondary smelters in the short term, until availability improves after the northern hemisphere winter (a time when cold weather tends to kill off older batteries), and as a recovery in supply of new vehicles leads to more old vehicles being scrapped.

Tight physical availability over the winter will continue to support LME prices in the short term, but once freight bottlenecks ease and the high metal inventories in China start to be redistributed to the rest of the world, it will be harder for LME prices to continue working higher.

We would add that underappreciation of lead’s role within the decarbonization agenda remains the greatest barrier to higher prices. This is particularly the case given that the development of hybrid microgrid battery energy storage systems make use of both lithium-ion and lead-acid batteries. We think lead acid batteries have a big role to play in the unfolding electrification era.

What buyers are saying

• The decline in lead capacity last year caught everyone by surprise; the US market is trying to reel back from the lack of capacity.
• The US lead market tightened after Doe Run closed its smelter in Herculaneum, in the US state of Missouri, in 2013 and Glencore closed its Brunswick smelter in Canada in late 2019. But the tightness was exacerbated during and after the Covid-19 pandemic by labor shortages, overall material shortages, transportation bottlenecks, and high cost of freight overseas. These have kept the premiums high.
• Some participants see spot premiums at 15-18 cents per lb for 99.97% ingot premium, ddp Midwest US and a couple of cents more for 99.99% ingot premium, ddp Midwest US. But they also see relief toward the end of 2021.

What sellers are saying

• A lack of imports, logistical problems and port congestions have made supply short in the United States while demand is strong after the reopening of the economy following Covid-19 lockdowns.
• Battery recycling has been robust since coming out of lockdowns last year. The demand for refined lead will keep battery recyclers very busy in the future.
• Lead has always been fluid and volatile because demand created by the surplus or lack of recycled product is the biggest indicator/influencer. No one really knows where that market is headed until scrap generation stabilizes in a post-Covid economy.
• We see the lead 99.97% ingot premium, ddp Midwest US to be plateauing within the 15-18 cents per lb range. It appears to be tapering off.

London metals week remains a key milestone in the commodities calendar. Find out why it’s still a big draw for the world’s commodity trading community, and discover our special LME Week 2021 coverage on key commodities such as nickel, lead, tin and lithium.