Why Lead Could Be About to Pull Away From Zinc

Why Lead Could Be About to Pull Away From Zinc

Prices for zinc and lead have moved largely in lockstep since December 2008, when cash prices for both metals were around $1,000 a tonne on the London Metal Exchange.

Since then, the gap has widened and narrowed, with lead consistently at a marginally higher price, but the trend lines for both metals otherwise mirror each other. On September 10, price of lead was $2,061.50, ahead of zinc at $1,915. That’s roughly where both metals were at the beginning of the year.

Zinc and lead have very different uses

It’s a baffling correlation as the two metals have little else in common: lead’s main use is in batteries, which account for 80 percent of global consumption. Because a large amount of lead goes into car batteries, the metal is somewhat tied to automobile sales, which can swing wildly depending on the direction of the global economy. But this use of lead also provides an element of stability, because of ongoing, predictable demand for replacement batteries.

“Forty-five percent of demand is recession-proof,” Stephen Briggs, an analyst at BNP Paribas in London, told Bloomberg in December. “Demand for replacement batteries will continue at more or less the same rate whether there is a recession or not.”

Zinc, on the other hand, is more closely tied to industrial demand. Its main application, which accounts for 47 percent of consumption, is as a galvanizing element in steel (to prevent corrosion). Its other uses are also predominantly industrial: in chemical applications — including as a pigment in paint — in die casting and in alloys, including bronze and brass.

Oversupply weighs on both metals

Holding both metals back is the fact that they are currently in surplus. From January through May, lead supplies were 32,000 tonnes higher than demand, while the zinc surplus came in at 149,000 tonnes, according to figures from the International Lead and Zinc Study Group.

That greater level of zinc oversupply is a trend that has held for some years now. From 2007 through 2011, the zinc surplus totaled 1.275 million tonnes, while lead exceeded demand by a much smaller 143,000 tonnes.

Adding to the problem is the fact that zinc and lead are often mined together. Frequently, they’re also extracted with higher-demand by-products, such as copper, gold and silver. That makes it more difficult for producers to curtail production in order to lower supplies and support prices.

Mine closures will shrink excess lead and zinc inventories

The good news for both metals is that they are expected to move toward balance in the coming years due to the closure of a number of mines. Minmetals Resources’ (HKEX:1208) Century mine in Australia, for example, is slated to shut down by 2016. That will take 500,000 tonnes of zinc out of circulation. In addition, Xstrata’s Brunswick mine (which also produces lead) will remove a further 220,000 tonnes a year when it closes in 2013. Further closures in Canada, as well as Kazakhstan and Ireland, will lower annual global production by nearly 1.5 million tonnes.

On September 11, 2012, BNP Paribas released its latest forecasts for a range of metals, including lead and zinc. In its report, the bank states that it feels that in the short term, prices for all base metals will continue to be driven by the probability of further stimulus measures from the Federal Reserve and other central banks. However, the bank did say that lead will outpace zinc.

The bank increased its average 2012 price for lead by $10, to $2,065 per tonne, and left its 2013 forecast price unchanged at $2,550 per tonne. At the same time, Paribas lowered its average 2012 forecast zinc price by $5, to $1,980 per tonne, and dropped its 2013 forecast by $25, to $2,325 per tonne.

Longer-term trends could give lead an edge

One factor supporting rising lead is an ongoing increase in battery demand, particularly for new products like electric bikes (e-bikes). According to figures from market research firm Pike Research, e-bike sales could reach over 30 million units this year, spiking to 47 million in 2018, for a combined annual growth rate of 7.5 percent. The agency expects China to account for 42 million e-bike sales in 2018, or 89 percent of the market.

As well, demand for new cars, particularly in emerging markets, continues to outpace economic growth. According to a new report from Canada’s Scotiabank, global auto sales are up 6 percent so far this year, to levels not seen since 2007. The bank saw a big jump in demand in Japan, where sales jumped 52 percent, and Russia, with a 29 percent increase. By the middle of this decade, Scotiabank expects Russian auto sales to top those of Germany, which is currently the largest car market in Europe.