Lead Outlook 2017: Surplus to Shrink

Despite seeing an overall drop in 2015 and underperforming other metals for most of last year, lead prices were on the rise in the last quarter of 2016.
The future for the base metal seems to be bright as demand is forecast to rise to 11.34 million tonnes in 2017, according to the International Lead and Zinc Study Group.
This year the market will continue to be in surplus but the excess will be less than in 2016, resulting in a more balanced market, the Group reported.
In December, the metal had gained more than 25 percent from the start of 2016, but analysts forecast a slight decrease in prices for 2017.

Price Forecast

Lead prices were on the rebound at the end of last year. After starting 2016 at less than $1,600 per metric tonne, they picked up to reach a high of over $2,565.5 per metric tonne late in November, jumping to a five-year high in the first week of December.
CRU’s lead market analyst Neil Hawkes said: “The recent rally has been a little overdone, though there is some fundamental support for lead values to hold on to some of the recent gains.”
The rally was supported by a shortage of the metal in China as a result of mine closures. In total, global mine production declined 7.8 percent compared to the first ten months of 2015.
“Lead, which had underperformed the other base metals for much of this year, has been catching up in the past couple of months, with contraction in lead mine supply and refined lead,” said Caroline Bain, senior commodities economist at Capital Economics.
“Lead prices have taken a dramatic turn, exploding into life, with values chalking up successive multi-year highs, both inside and outside China; leaving the lead industry to work out how much of the price hike is fundamentally justified,” Hawkes said.
For 2017, according to FocusEconomics Consensus Forecast report, analysts expect an average price of $1,977 per metric tonne.
CPM group forecast prices at $2,066 per tonne while Macquire expect prices to average $2,003.
More optimistic are analysts at TD Bank and Societe Generale, expecting prices to average $2,116 and 2,200 accordingly.

Supply and Demand

Lead, the fourth most used metal worldwide, has the largest applications in batteries and communications. The metal can be recycled indefinitely without losing its properties, accounting for more than 60 percent of total production.
Lead depends on lead-acid batteries for about 80 percent of demand in top consumer China  and while the world has got all eyes on lithium thanks to Tesla and other electric vehicle pioneers, all of them still need a traditional 12-volt lead-acid battery to work.
According to a Persistence Market Research report, the global market for lead acid battery had revenues of around US$ 46.8 billion in 2015, which are likely to climb up by the end of 2016.
A rising demand for electric or battery-operated vehicles is generating a visible level of demand for battery on a global level, especially in developed regions.

Global demand for refined lead metal is forecast to rise by 2.8 percent to 11.19 million tonnes in 2016 and a further 1.3 percent to 11.34 million tonnes in 2017, according to ILZSG.
“In China, strong growth in vehicle production and sales have helped to balance declining demand for lead-acid batteries in the e-bike sector where sales of lithium-ion batteries are reported to be rising,
“It is anticipated that Chinese lead usage will rise by 2.5 percent in 2016 and 1.1 percent in 2017,” ILZSG reported.
According to BMI research, global mine production growth will continue to slow due to both a subdued price recovery and a weak global project pipeline.
“Globally, China, Australia, the US and Peru will account for more than 75 percent of global lead production over our forecast period to 2020,” they said.
ILZSG anticipated that in 2016, supply will exceed demand in the global refined lead metal market by 42,000 tonnes. In 2017, an even closer balance is predicted with current data indicating that the market will be in surplus by 23,000 tonnes.
But BMI Research remains even more optimistic and said: “The global primary lead market will shift into deficit by 2018 on the back of persistent supply cuts. Mined lead production will be hit by a global slowdown in mining capital expenditure, which will have a knock-on effect on refined lead supply growth.”

Investor Takeaway

It seems lead has a bright future ahead, but this will not happen in the short term. As supply continues to decrease and demand picks up supported by Chinese consumption and worldwide battery demand, the market might tighten and finally balance. Certainly, things are looking better for lead and investors could be surprised by this metal in the next few years.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.