(Repeats Feb. 2 story with no change to text)
By Andy Home
LONDON, Feb 2 Last year zinc was the star
performer among the major base metals traded on the London Metal
Might it be sister metal lead's turn to shine this year?
The unglamorous heavy metal has already had a tumultuous
start to 2017.
LME three-month metal, currently trading around
$2,340 per tonne, has notched up a year-to-date gain of over 16
percent, beating zinc into second place.
Funds have been quietly lifting their exposure. As of the
close of last week the money manager net long position was equal
to 18.5 percent of open interest, a record level since the LME
started publishing such data in July 2014.
A ferocious squeeze on the London market has helped. The
LME's benchmark cash-to-three-months spread CMPB0-3 traded out
to $45.50-per tonne backwardation at one stage last month, a
degree of tightness not seen since 2011.
In the mix has been a dominant long position holder and a
sharp rise in cancellations of LME lead stocks. The amount of
metal earmarked for physical load-out from the LME warehouse
system currently stands at 67,225 tonnes, representing almost 36
percent of total exchange stocks.
Seasoned watchers of the London lead market might be
forgiven for rolling their eyes at this point.
We've been here before. There were similar squeezes on LME
stocks in both March and December 2015 and neither of them had
anything to do with real-world demand. Rather, they resulted
from "warehouse wars" as storage operators competed for stocks
and rental revenues.
But this time might just be different because there is a
growing sense that this opaque market might really be tightening
up to the point that metal is now being hoarded in expectation
of a physical squeeze later this year.
Graphic on LME lead stocks; open and cancelled tonnage and
ratio of cancelled tonnage since Jan 2015:
HERE WE GO AGAIN?
Last month's sharp contraction in time-spreads bore all the
hallmarks of one of those periodic tussles for LME-stored lead
that has enlivened an otherwise dull market in recent years.
Some 15,000 tonnes of metal that were earmarked for physical
load-out in the Dutch port of Vlissingen were placed back onto
Within days another 43,000 tonnes of LME stocks had been
cancelled, primarily at the South Korean port of Busan but also
across a range of European locations.
At the heart of all this stocks mayhem has been the
unidentified entity gripping the nearby spreads. At times it has
controlled positions equivalent to between 80-90 percent of
available LME tonnage. The latest exchange report <0#LME-WHC>
shows it still there with 50-80 percent of stocks.
Superficially, this might look like the latest round in the
tit-for-tat smash-and-grab "warehouse wars" that caused similar
spread and stocks disruption in both 2015 and early 2016.
LME metal would be cancelled and disappear from one location
only to reappear in another, only for the original victim to
turn aggressor and start the cycle again.
The long-term impact on LME stocks has been negligible. They
started this year at 191,650 tonnes, little changed from 221,975
tonnes at the start of 2015.
But the word in the tight-knit lead trading community is
that this time is different with traders rather than storage
operators taking strategic physical positions in expectation of
a looming squeeze on availability in the real world rather than
SISTER METALS, TWIN DYNAMICS
The squeeze has already started upstream at the mine
concentrates stage of the supply chain.
Treatment charges (TCs), which is what smelters charge
miners for transforming raw material into metal, are the best
indicator of what is happening in the concentrates part of the
And, according to research house Wood Mackenzie, spot TCs
into China are currently below $20 per tonne, down from $80 just
three months ago and the lowest level since at least the turn of
In this respect lead is playing catch-up with zinc. The two
metals are commonly found in the same deposits with lead the
"ugly sister" by-product to zinc.
The closure due to exhaustion of mines such as Century in
Australia and Lisheen in Ireland may have grabbed the zinc
headlines but both were also producers of lead.
And while the zinc market is on tenterhooks as to when
Glencore might reactivate the 500,000 tonnes of zinc mine
capacity it shuttered at the end of 2015, it's easily forgotten
that the same company has 100,000 tonnes of lead capacity in
Global mine production of lead fell by 3.3 percent in 2015
and by a sharper 7.5 percent over the first 11 months of 2016,
according to the International Lead and Zinc Study Group.
A SPECTACULAR YEAR?
As with zinc, the consensus is that it's only a matter of
time before the squeeze on raw materials translates into a
squeeze on refined metal. Indeed, it might be happening faster
"The supply deficit is the big story for 2017," according to
Farid Ahmed, principal lead analyst at Wood Mackenzie.
The company estimates last year's refined lead shortfall of
38,000 tonnes will become a more acute 86,000-tonne deficit this
As ever with lead, there is considerable uncertainty as to
what is happening in the scrap part of the supply chain, which
accounts for a much higher ratio of supply than for other
But, according to Ahmed, "the secondary sector is limited in
its ability to respond to the primary shortfall," dependent as
it is on the recycling of scrap batteries.
Batteries fail during extremes of hot and cold weather
rather than responding to any price or economic cycle.
And with lead only accounting for around 14 percent of
revenue for miners, new mine supply is going to depend on what
happens to the price of zinc rather than its "ugly sister".
Wood Mackenzie is forecasting the lead price to rise
steadily through 2017 and to exceed $2,500 per tonne next winter
during the "battery kill" peak demand season.
"Stock movements point to major players positioning
themselves ready for a major squeeze on metal availability,"
according to Ahmed.
His conclusion is that "this year promises to be spectacular
So maybe not just another "warehouse war" squeeze after all?
(Editing by Adrian Croft)