Lead Supply Freeze May Buoy Prices Up When Pandemic RecedesBy Alejandro Ehrenberg | Tue, 04/28/2020 - 16:51
Mexico is the world’s fifth-largest mine lead producer. In 2018, it churned out 5 percent of the heavy metal’s global mine output. The state of Zacatecas was the top lead miner in Mexico in 2018, followed by Chihuahua and Durango. That year, Newmont’s Peñasquito produced 22 percent of the country’s lead. Other prominent producers were Peñoles, Frisco and Grupo México.
Lead has not been an exception to the base metals’ price contraction in 2020. Information released by the London Metal Exchange shows that lead prices have decreased approximately 15 percent throughout the year, while copper and zinc have fallen roughly by 17 percent. This is mainly due to the COVID-19 demand shock that has jolted industrial operations around the world.
Nevertheless, certain factors have prompted analysts to form a positive outlook for lead, pointing out that it is “well-positioned against other industrial metals.” This might be surprising, given that, according to the International Lead Association, 85 percent of all lead goes into acid batteries crucial for the functioning of cars, trucks, buses and other vehicles. The global automotive industry has steeply ramped down as a response to COVID-19, making it reasonable to expect calamitous effects for the heavy metal. But, as S&P Global explains, even if new vehicles are being produced at a smaller amount, “car and truck batteries still need to be replaced approximately every three years, so the hard base of battery replacement is shoring up lead demand.”
Additionally, China has started buoying up lead and other industrial metals’ demand by subsidizing inventory purchases. As reported by VOX Markets “local governments across China are offering incentives to companies purchasing base metals, in a move to avoid inventory pile-ups.” The online news outlet explains that public funds will cover 80 percent of the interest on loans taken out for buying metals and keeping the supply chain in motion. Vox Markets goes on to say that “Gansu province is mulling a plan to encourage local companies to stockpile up to 436,000 tons of nonferrous metal through the use of subsidies for interests and warehousing fees and that more local governments are coming under pressure to introduce similar incentives.”
On the supply side, lead has shown a particular advantage over other base metals. Its supply chain has demonstrated a unique capacity to freeze in the face of a demand shock. As Wenyu Yao notes in an article for ING Thinx, “unlike other metals that have experienced a surge in inventory over the first quarter, lead's total inventory in the China market has largely been drawn down. Total inventory has plummeted to just 9kt in the first week of April.”
The reasons for lead’s quick response are explained by Andy Home in a must-read Reuters analysis piece. First, Home highlights that, in the face of a demand shock, metal producers and processors tend to clench their teeth and keep on producing until the market no longer allows them to. But lead is unlike other base metals, in that only about a third of its yearly output corresponds to mined concentrates. The majority of it comes from the recycling of automotive batteries. As Home indicates, “it is the hit to that part of the supply chain that explains lead’s super-fast supply response. The battery recycling sector depends on geographically extended collection systems, which have been knocked out of action by lockdowns.” A ramp down in recycling activities, coupled with mines halting production, translates into “no massive build in stocks left hanging over future prices.” Once demand picks up again, lead prices will be in a better position than those of other metals whose inventories have ballooned during the sanitary crisis.