Why Lead’s Future Looks Bright

- May 16th, 2012

With health and environmental concerns weighing less heavily on lead, the market is now set for a positive turn.

Why Lead’s Future Looks Bright

Lead has been used by humans for more than 5,000 years. Throughout prehistory, it was mainly used in art because it is easily malleable; the oldest lead artwork, a figurine, was found in Egypt and dates back to 4,000 BC.

Later, the Romans began to use lead for industrial purposes. They took note of the metal’s resistance to rust and used it in pipes and to line baths. It was eventually also used in ammunition, solder, pesticides, sheathing for cable, and as an additive to paint.

Near the turn of the century, lead demand soared with the advent of the automobile; the metal was mainly used in lead-acid batteries – a market it continues to dominate today – and as an additive to fuel to prevent engine knocking. As a result, lead production rose sharply from 1900 to 1981, from 749,000 tonnes to 3.35 million tonnes, according to the US Geological Survey.

Lead has overcome environmental concerns

In the 1970s and 1980s, rising awareness of the risk of lead poisoning prompted governments to enact stricter environmental standards that severely limited lead’s use in paint, fuel, water infrastructure, and other applications.

Even so, lead production remained steady throughout the 1980s and 1990s, at around 3.3 million tonnes. It rose sharply to about 3.9 million tonnes in the first decade of the 21st century.

That’s partly because rising car sales pushed up demand for lead-acid batteries, which offset lead bans. Today, batteries account for about 80 percent of lead usage, and battery demand has jumped as industrialization has spread across the developing world, fuelling sales of products like lift trucks, communications infrastructure, and most importantly, cars.

Steady demand for replacement batteries also helps shield lead demand from economic volatility.

“Forty-five percent of demand is recession-proof,” Stephen Briggs, an analyst at BNP Paribas SA in London, told Bloomberg in December. “Demand for replacement batteries will continue at more or less the same rate whether there is a recession or not.”

Now it’s fair to say that environmental regulations are more of a plus for the metal than a negative. One reason for that is the development of a highly successful battery recycling program that has sharply reduced emissions of lead into the environment. Today, roughly 95 percent of the world’s lead-acid batteries are recycled, according to the International Lead Association.

Lead’s resistance to radiation has also helped the metal find wider use as countries look to cut pollution by switching from coal– and gas-fired power plants to nuclear facilities.

China’s appetite for cars continues to increase

One factor that should support higher long-term lead prices is rising car sales in China. Car sales got off to a slower-than-expected start in the country in 2012 but rose 4.5 percent in March, beating analysts’ expectations and allaying concerns that demand may be weakening.

Moreover, for the first four months of 2012, General Motors (NYSE:GM), the largest foreign carmaker in China, reported that its sales rose 9.4 percent to 972,369 vehicles from a year earlier. Toyota (NYSE:TM) reported a 14 percent gain to 293,000 vehicles.

China’s automobile market is now the biggest in the world, and according to a new report from IHS Automotive, is expected to reach annual sales of 30 million vehicles in 2020, up from 18.5 million in 2011.

How to invest in lead

Lead was first traded on the London Metal Exchange in 1903, but one of the easiest ways for investors to tap into rising demand for lead is to buy shares of companies that mine it.

Lead is usually found in ores with other metals, mainly zinc, silver, and copper. As a result, there are few mining companies that are completely focused on lead. However, there are a number of diversified mining stocks that provide exposure to the metal. Here are four:

BHP Billiton (NYSE:BHP) owns the Cannington mine in Queensland, Australia. According to the company, Cannington is the world’s largest, lowest-cost producer of lead and silver.

Teck Resources (TSX:TCK.B) mines lead and zinc concentrate at its Red Dog project in Northwest Alaska.

Hecla Mining (NYSE:HL) has been operating the Lucky Friday silver, lead, and zinc mine since 1958. The project is located one mile east of Mullan, Idaho. Apart from the mine, the site also includes a mill that’s capable of processing 1,000 tons of ore per day.

Ivernia (TSX:IVN) owns the Magellan mine in Western Australia, which is one of the few mines that focuses solely on lead. However, the site has been closed for maintenance since April 2011.


Securities Disclosure: I, Chad Fraser, hold no positions in any of the companies mentioned in this article.

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