Lead Soldiers On

September 10, 2007

 What’s the best-performing commodity over the past year? Not oil or gold, but lead...

  • Do we still use lead?
  • Supply constraints at the LME
  • New supply in the offing

 

Lead pencils, leaded gasoline, lead paint. Three things you don't find much in the U.S. anymore. Because of this, lead may not be something that is on your radar unless you're reading about the massive toy recalls by Mattel and others. But lead is still used extensively in batteries; in fact, 71% of all lead is used here. Another 12% is still being used in pigments and other compounds. The remaining lead is used in extruded products, ammunition, cable sheathing and other alloys. In other words, it's still a pretty useful metal, even given its hazardous health effects.

It has also been a pretty profitable metal, up 78% since last year. How's that for a lead balloon?

What could possibly be driving this bull market in lead? Could it possibly be justified? Or is it just speculators moving the price of metal for fun?

Historical Supply and Demand

As always, the place to start is with supply and demand.

Looking at statistics from 2003 to 2006, worldwide mine production has risen 10%, even though both the U.S. and Oceania (basically Australia) decreased their output. Asia, Europe and Africa's combined output was enough to see the increase; primarily due to Asia (up 30% since 2003). Global metal production (the amount of lead that comes out of the smelters) decreased by less than 1%, even though the manufacturing giant Asia saw an increase in its metal production of 45% since 2003.

Those are the supply numbers, and now we turn to demand. You'd think that because of all of lead's problems and lists of things it's no longer used in, consumption would be down. But alas, numbers rarely lie. Worldwide consumption is up 16.9% on the back of Asia, which has increased its consumption of lead 38% since 2003. The U.S. is the second-largest consumer of lead and we've used almost 7% more since 2003. That's a lot of car batteries and backup power supplies for NSA supercomputers.

And Now ...

We've got China's economy moving right along so far this year, with metal imports high and construction and manufacturing going strong despite all the hubbub in world financial markets. In the U.S., the credit fiasco hasn't impacted lead as much as it could, though auto makers are expecting to feel the pinch in the aftermath of the subprime lending debacle. With their August sales numbers reported, auto manufacturers (the guys who stick those lead batteries in our cars) are looking at a mixed bag. But all in all, demand for lead seems to be pretty steady.

It's the Supply, Stupid

So why the high prices? It’s the volatility of supply.

Indeed, in the lead market, it’s been a rocky road of late. In March, Ivernia Inc. (TSX:IVW) stopped production in a mine in Australia due to a lead poisoning investigation. (Ivernia has about 3% of global mined output.) In July, an explosion at a smelter in Missouri run by Doe Run Resources, the second-largest lead refiner in the world, further reduced production. The plant was up and running by August, but it will take a while to make up for the downtime. Later in July, lead hit an all-time record of $3,500 a ton on the London Metal Exchange, as the LME's lead stockpiles dried up. It was the classic economic model: High demand + low supply = high prices. But there's little doubt that speculation was involved in pushing the price up to that level, as just two weeks later (August 6), lead fell 8.7% in a single day, and had it closed at that price, it would have been the biggest 1-day decline since May of 1987. This kind of correction wasn't unexpected by many analysts. Maybe the equation should read: High demand + low supply + speculation = high prices?

Right now (as of September 5) LME stockpiles are sitting at 24,750 tonnes, which is less than two days' supply. In fact, if you look at the LME Lead warehouse stockpile graphs, there is a steady downward trend with the exception of a bump up in stock during the spring. Of course, with lead still at record prices (even if it has been a rocky few weeks), production will climb as mines are expanded to take advantage of the price increases. Apex Silver Mines Ltd (AMEX:SIL) has a mine in Bolivia that is expected to come on line during the last part of 2007 and expansions are planned in Australia by mines run by BHP Biliton Ltd. (NYSE:BHP), Teck Cominco Ltd. (NYSE:TCK) and Xstrata Plc. (LSE:XTA). Xstrata is also looking to increase its shipments from one of its refineries.

Eventually, supply will catch up. But until that happens, speculators and basic supply shortages will continue to hold the day.

ADDITIONAL RESOURCES

LME
Standard Lead
International Lead and Zinc Study Group

Bloomberg
Lead Is Poised to Tumble on Xstrata Output, Recycling (Update4) August 6
Lead Pares Gains, Industrial Metals Drop, as Equities Decline August 14
Lead Rises on Speculation Demand Won't Slow; Copper, Zinc Gain August 23
Zinifex Shares Gain on Record Profit; Metals Outlook (Update2) August 27 [READ]
Zinc, Nickel, Other Metals Decline on Concern About U.S. Growth September 4

Other
China to help boost lead mine output - database Reuters.com August 2, 2007
Lead prices set to plummet from near-record level International Herald Tribune August 6

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