Lead - A Heavy Weight for the Battery Industry
At the BCI (Battery Council International) Conference in May 2004, the rising costs of lead and its impact on the battery business was discussed not only in presentations but in conversations amongst the attendees. Prices had soared; lead had stretched to touch the $1,000/ton early in 2004. Supplies of primary lead were reported to be short; in fact, the ILZSG (International Lead Zinc Study Group) forecasted that the Western World shortage would be 130,000 tons in 2004.
Is it a bull market for lead or is the market full of bull?
To answer this question, three experts who analyze and track the lead industry spoke to the attendees.
Maqsood Ahmed, a metal analyst with Calyon Financial Inc. of London England
He viewed the price evolution of lead as being a hype. The entire commodity story, of which lead is a component, is driven by China whose first quarter GDP was a +9.7%. He felt that there was only a temporary mismatch between supply and demand. He said it is not unusual for financial markets to have a propensity to overshoot, and this was true for lead.
“The continuing weakness of the U.S. dollar will support high prices.” In looking at the volumes for lead trading, he found them to be very thin above $700/ton. He did not see much depth in the market “Bubble,” and he noted a lack of producer forward selling. So, what is the bottom line price/ton for the remainder of 2004? The average, he thought, would be about $700/ton. Mr. Ahmed said the trading pattern will waiver “two steps up, three steps down.”
Peter Hochschild, president of Hochschild Partners - Considar Metal Marketing, Inc.
Mr. Hochschild reminded the attendees that during the time of lead’s rise, other commodities rose such as crude oil, soybeans and silver. General economic factors in the U.S. - including the increasing federal budget deficit, the dollar weakness and possibilities for inflation - were responsible. In this time of global recovery, low prices suffocated raw material supplies, and as a result, there was a shortage of lead concentrates and smelter closures. In fact, Mr. Hochschild mentioned nine smelter closures which resulted in a deficit of 465,000 total tons. Other factors contributing to the current lead situation were the new Chinese capacity needs and the constraints on scrap supplies for the secondary smelters. He noted that there are changing patterns in the market which will have some relevance on future trends; those factors are third party distribution, the European deficit and the premium effect of lead itself.
Using data from CHR Metals Ltd, he reported on the lead market balance for 2004 in which the total refined lead supply would be about 6,939 million tons compared to lead consumption of 7,126 million tons, thus leaving an apparent market balance of a negative 187 million tons.
Richard Amistadi, Vice-president of Sales & Marketing, the Doe Run Company
Mr. Amistadi entitled his presentation, “Lead: A Perfect Storm,” because as he said, “The dramatic rise in the lead price is the result of a confluence of several factors - all of which were positive for a higher lead price and restricted availability. Rarely, do all these factors occur at one time. When they do, prices rise dramatically and, for lead consumers, you have the ‘perfect storm.’ This perfect storm occurred in the first quarter of 2004.” Although reviewing the situation globally, many of his comments specifically related to the North American market.
The situation - From August 2003 to March 2004, the L.M.E.’s (London Metal Exchange’s) lead price rose from $.22.5/.lb to over $.40/.lb, an increase of 78 percent. In 2003, six smelters also suspended operations and several mines, producing zinc and its by-product - lead, closed.
The China factor - In the past few years, China has developed primary lead smelters, and with their low labor costs, this Asian country was able to become a significant global competitor. As a result, Mr. Amistadi commented, “the Western smelters either had to pay price levels for lead concentrates that were below break-even costs or had to cut production which increased their units costs.”
The increase for metals, including lead, in China has been phenomenal. Their industrial production has grown 8% annually since 1991 and in 2003, the growth rate was almost 15%. The trend does not seem to be leveling off. New vehicle production is projected to rise 4 to 5 times during the time period from 1997 to 2005; more lead is needed and it is being produced. Mr. Amistadi stated, “Today, China produces more lead than any other country!” (Note: a report by the Asian Development Bank in 2004 said China is the world’s second largest consumer of lead.)
The European deficit - European lead metal consumption has grown at a modest pace since 1998 with the eastern Europeans, having workers with lower cost labor rates, gaining the greatest share. But, European primary lead production has declined, not because of lack in demand but, because the lead feed (concentrate) is expensive. Smelters cannot be competitive on the world market. The lead metal deficit is approaching 400,00 million tons. Some of this deficit has been filled with imports from China and South America
The U.S. deficit - Since 2000, U.S. metal consumption has declined because of the burst in the telecom industry, longer SLI (Starting, Lighting and Ignition) battery life and battery imports. The three-year sliding decline equals 300,000 metric tons. As in Europe, smelters cannot be competitive in production so US lead production has declined by approximately 150,000 metric tons from 2000 to 2003. In 2003, the U.S. had a production deficit of 200,000 metric tones. To fill in the gap, imports of lead metal have come from Canada, Mexico, China and Australia.
A snapshot of lead , May 2003 - With the world deficit of lead (mainly due to supply cutbacks), a deficit in the decline in L.M.E. stocks and commodity speculation along with a weak U.S. dollar and the China factor, the lead price increase seems to be very dramatic. How high lead will remain is a speculative guess, but all factors suggest that lead will remain bullish.
Looking through the leaded-crystal ball
Economic forecasters such as GFMS, CRU, CHR and the ILZSG have all done their homework and continue to see an increased deficit of lead for 2004. If this is so, will there be Lead-acid battery manufacturers who will need to curtail production because of lead shortage?
What are some factors that could provide some positive news? Possibilities include: a change in the fundamentals of supply and demand, a stronger US dollar, and reduced commodity speculation.
The only source for a new supply of lead is the opening of new mines. (Recycled lead is a closed loop.) However, there is only one known mine, Ivernia’s Magellan Project in Australia, to be developed in the near term. A typical mine’s output is 50,000 metric tons; thus, the deficit could be reduced but not eliminated with only one new mine opening and no new closings.
The August 2004 consensus - With an official L.M.E. cash buyer price of US$975.00/ton for lead on August 5, 2004, lead is still at a premium and the bulls reign in this arena. Aggressive commodity fund buying still remains the strong driver. Unfortunately, for the Lead-acid battery industry, prices averaging $.36 to .$38 per pound of lead are too high, and European and U.S. battery makers will find challenges to remain competitive in a global market.