5 Lead Price Drivers to Watch in 2018

- January 29th, 2018

As the lead price continues to trend upwards, Wood Mackenzie analysts share their thoughts on five factors that could impact the market this year.

Lead had a strong 2017, increasing more than 23 percent in 12 months and touching a six-year high in October.
Prices have traded above the $2,500-per-tonne mark since then on the back of supply shortages and strong demand. On Monday (January 29), LME lead closed up 0.4 percent, at $2,602, for an increase of over 5 percent year-to-date.
Many analysts believe 2018 could be another bright year for the base metal. Most recently, analysts at Wood Mackenzie released a report on five lead price drivers to watch this year. Read on to learn what they had to say.

1. New mine supply outside of China

One of the lead price factors they recommend keeping an eye on in 2018 is new mine supply from countries outside of China, the world’s top lead producer.
“We forecast an increase in mine production in the Rest of World outside China (ROW) of 8.5 percent this year, implying 12.2 percent in total before our allowance for disruption,” the analysts said.
Australia will account for half of this growth, with MMG’s (HKEX:1208) Dugald River, Glencore’s (LSE:GLEN) Lady Loretta and South32’s (ASX:S32) Cannington all adding new supply to the market. Meanwhile, Goldcorp’s (TSX:G,NYSE:GG) guidance points to a recovery in production at the Mexico-based Peñasquito mine due to a temporary but substantial increase in head grades.
“We expect little overall change in Indian mine production but will be looking for significant incremental changes at Hindustan Zinc’s mines,” the analysts added.
Elsewhere, the analysts anticipate progress in ramping up production at, among others, Trafigura’s new Castellaños joint venture in Cuba and JDS Silver’s redeveloped Silvertip mine in Canada.

2. Smelter appetite for margin over volume

According to Wood Mackenzie, refined lead production will likely fall short of consumption this year, even though there will be enough smelter and refinery capacity to process all of the raw material available.
“There is also sufficient capacity for treating some existing stocks of lead concentrate, although there is a limit to how far smelters’ working inventories can be cut,” the report says.
The analysts expect the concentrate market to remain tight — and get even tighter — for much, if not all, of 2018. “Together with capacity utilisation, market tightness will be demonstrated by the spot and contract TCs (treatment charges) agreed this year, with spot business already conducted with negative TCs in recent months,” the analysts added.

3. Chinese demand

Another key lead price driver this year will be the extent to which smelters outside of China reject available concentrate tonnages, as this will help determine the refined lead trade with the Asian country.
Last year, China imported over 100 kilotonnes of finished lead metal, the highest total since 2009. “Any swingeing cuts in concentrate tonnages by ROW smelters would make additional material available to Chinese smelters, thus cutting the requirement for refined lead imports,” the report says.
This would limit chances for a positive arbitrage between Chinese and international lead prices, which “would support spot TCs and limit how far they fall below annual contracts levels,” the analysts said.

4. Slowdown in auto production

One of lead’s key uses is in automotive batteries, with the sector accounting for almost two-thirds of total demand. However, the global rate of growth in this sector has slowed since 2016 and is expected to continue to decline for about five more years.
“There will be some offset from the rapidly increasing use of lead batteries for energy storage systems, particularly in the renewable power generation sector, but the refined lead supply-demand balance will remain sensitive to changes in automotive production,” the report says.
The analysts also said that any changes in the automotive sector in the two biggest car-producing nations, China and the US, could have a significant impact on the lead market.

5. China’s environmental crackdown

Last year, China imposed tough environmental regulations to fight pollution, and they resulted in many mine and smelter closures. According to Wood Mackenzie, production at primary lead smelters will continue to be restricted by environmental regulations in 2018.
“The Chinese authorities are also being more cautious in approving new smelter projects against these higher environmental standards,” the report says.
However, the analysts expect a rise in secondary Chinese lead production with the commissioning of several new projects this year. “There is a downside risk as the availability of scrap batteries might reduce in major secondary lead-producing provinces. This is due to scrap lead batteries being classified as hazardous waste and thus transportation across different provinces is banned,” they added.

Deficit and prices in 2018

With all the factors mentioned above in mind, Wood Mackenzie’s analysts forecast a 115-kilotonne deficit in the refined lead balance in 2018, after a 119-kilotonne deficit last year. 
“We do not expect to see the market move back into surplus until 2020, which will help sustain higher lead prices,” they said. Last year’s average lead price was $2,317, a six-year high. For 2018, the analysts predict that the average price will go even higher, to around $2,450.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

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