Lead prices may rise to new highs on supply worries
Source: Morning Star
Supply-side problems in Australia and Peru are expected to push lead prices to new all-time highs, analysts said Tuesday, with the market moving into a deficit.
A strike in Peru, force majeure on shipments from Australia"s Magellan lead mine and ongoing uncertainty over ore grades at the Black Star mine in Australia have already combined to lift London Metal Exchange prices higher.
At 1245 GMT, LME lead was up 2% on the day at $1,960 a metric ton, a gain of 3% from Monday"s low of $1,905/ton. This is also a rise of 29% since the start of the year.
The strike that kick-started Tuesday"s gains began Monday and is by around 1,700 unionized workers at Doe Run Company"s La Oroya complex in central Peru. Doe Run is the largest integrated lead producer in North America and the third largest total lead producer in the world.
And supply side concerns were also heightened by Canadian producer Ivernia Inc"s (IVW.T) declaration of force majeure on shipments from its Magellan mine in western Australia.
The situation is expected to last between three and four months, Ivernia said. Magellan is currently in the ramp-up phase but is expected to be one of the top five lead-producing mines in the world, yielding close to 3% of total world mine production.
Magellan started at the end of the third quarter of 2005 and is steadily getting to full capacity of 100,000 tons year. In 2006, it produced 63,200 tons of lead metal in concentrate.
Combined with the ongoing force majeure situation at Xstrata PLC"s (XTA.LN) Northfleet refinery sited in Kent, U.K., because of reduced supplies from its Mount Isa smelter in Australia, analysts said a rally through $2,000 a metric ton in LME trade is on the cards.
Inventories in LME warehouses are also critically low and have straddled the 30,000-ton level for many weeks. As lead inventories have fallen significantly, LME prices have risen to current highs.
"The decline in LME stocks from a peak around 110,000 tons at the end of the second quarter of 2006 to current levels around 30,000 tons, have borne exceptionally heavily on European locations, which since year-end have held zero inventory," said Helen Henton, head of commodity research at Standard Chartered.
Henton noted that Western European premia have risen $50/ton in the past two months, but the differential is still insufficient to cover the high freight cost to Europe which would result in a relocation of stock.
And according to Calyon analyst Michael Widmer, both Northern America and Europe are deficit regions.
He said that although China could help fill this gap, net exports have year-to-date been relatively subdued. China is the world"s largest producer and exporter of lead.
"This means that the lead market is set to remain relatively tight and LME prices should remain well above historic averages," Widmer added.
China has been the difficult card to read with the elimination of the 13% VAT rebate on exports coming into effect Jan. 1 and distorting the usual flow of material.
Analysts said that rising stocks in Singapore towards the end of 2006 were a direct result of the surging level of Chinese exports, in anticipation of the end to the VAT rebate.
Currently, Singapore is the biggest warehousing location for LME lead stocks, at 15,850 tons or 46% of the total.
But by February, Chinese lead exports were down 84% year-on-year, according to the latest Chinese customs data. And now some metal is now moving back into China as the tightening market conditions have become evident.
China's lead concentrate production in February posted a modest rise to around 42,000 tons, but it remains around half of December"s 79,000-ton figure. China's output of lead concentrates and refined metal have decelerated, implying that the tax changes may have been successful in curbing output.
Analysts also noted that China's refined lead metal production was at 203,000 tons in February, the lowest figure since August last year.
"The deceleration in China's refined lead production, combined with the elimination of the export tax rebate, has resulted in a steep fall in China's lead exports," said Standard Chartered's Henton. Traders in London said that the longer that this price-supportive situation continues, the higher lead prices look set to move. |
