Andy Home: Will Lead's Premium Over Zinc Last?

Reporting on zinc and lead prices, Reuters’ Andy Home states that lead has recently re-established a premium over zinc for the first time since June 2014. He notes that the “collapsing zinc premium over lead” largely reflects “collapsing sentiment” towards zinc.
However, he adds that “there is a case to be made for lead moving back to a sustainable premium to zinc, at least for a time.”

Lead has a built-in immunity to broader macroeconomic cycles because so much of it is used in making batteries and so much of that battery usage goes to replace dead batteries.
Batteries fail in good times and bad times alike and they particularly fail during cold weather, meaning the Northern Hemisphere winter is often called the “battery kill” season.
That combination of defensive and seasonal strength helps explain why lead is currently the best performer among the LME contracts right now. Or, given the current bear environment, the least worst, down only 12.5 percent since the start of the year.
It’s true that it doesn’t benefit from the zinc narrative of imminent mine closures, a long-running story-line that is finally starting to take concrete shape as mining winds down at both Century in Australia and Lisheen in Ireland.
Both mines produce lead as a by-product but they are “lead light” relative to the amount of zinc they produce.
But this zinc narrative is a slow fuse affair. Although closing mines should over time feed through into a tightening market, the initial impact will be mitigated by stocks of both raw material concentrate and refined metal stocks.
And, as the market has just been reminded, there is a lot of zinc inventory sitting in New Orleans, whether it is visible or non-visible at any one time.
And a lot of lead inventory as well, which is why stock movements are characterised by sporadic raids by warehouse operators tussling over who gets to store it all.
The jury seems very much out on how the lead-zinc relative value trade is going to play out over the coming months with no clear consensus among analysts.

That said, Home concludes that investors should remember:

This is not a beauty contest. It is an ugly contest between two metals that experienced their “supercycle” price peaks almost a decade ago and have struggled to get anywhere close to those peaks since because of over-supply and legacy stocks.

Click here to read the full Reuters report.