Column: Shanghai short squeeze shocks lead market into life
reuters.com
By Andy Home
September 5, 20235:01 PM PDTUpdated 16 hours ago
LONDON, Sept 5 (Reuters) - Lead is not a metal that tends to grab the headlines but the market has just hit a rare pocket of turbulence.
The Shanghai Futures Exchange (ShFE) lead price jumped to a four-year high of 17,540 yuan ($2,402) per metric ton on Monday amid surging volumes and open interest.
This has come as something of a surprise. Lead market dynamics are currently tepid at best due to weakness in the automotive sector, which accounts for around 70% of total demand in the form of lead-acid batteries.
The International Lead and Zinc Study Group estimates global lead usage contracted by 0.9% in the first half of this year, generating a modest 25,000-metric ton supply surplus.
But some of that surplus would be very welcome right now in Shanghai, since the local market is in the grips of a vicious short squeeze.
 ShFE price, stocks and market open interest
BIG SHORT
This Shanghai lead squeeze has been building for a couple of months. ShFE time-spreads were already tightening up in July against a backdrop of low exchange stocks and rising open interest.
The tightness has since become acute, the cash premium flexing out to levels last seen in October 2020.
Open interest has grown further, peaking at a life-of-contract high of 211,549 contracts last week and still historically huge at 197,564 currently.
Lead volumes last month exceeded two million contracts for the first time since March 2022.
The big short has also grown in size.
ShFE's daily ranking reports, listing the biggest positions by broker, show CITIC Futures is holding a massive short position of 18,145 contracts on the October contract and 17,394 contracts on the November contract.
It is unlikely to be the ultimate owner of the positions but whoever the entity is, it is sitting on a bear bet equivalent to 177,695 tons of lead.
Which is a problem since as of last Friday there were only 51,761 tons of lead sitting in exchange warehouses.
 China's net trade in refined lead
EXPORTING SURPLUS
ShFE lead stocks have rebuilt marginally from a three-year low of 24,092 tons in late April but this time last year they stood at 70,000 and two years ago there were close to 200,000 tons lying in exchange warehouses.
Much of that metal has been exported.
China was a net importer of refined lead in the 2017-2020 period but outbound volumes started accelerating in the third quarter of 2021.
Over 300,000 tons of metal have since been shipped abroad, plugging supply-chain gaps in Western markets caused by COVID-19 disruption.
The pace has not slackened this year. Indeed, exports of 19,600 tons in July were the highest since January and cumulative exports of 94,000 tons are closely tracking last year's volumes.
The top three destinations for Chinese refined lead this year have been Taiwan (23,550 tons), Vietnam (19,000) and Bangladesh (13,900).
Imports have all but dried up over the same period. Inbound shipments amounted to just 1,900 tons in the first seven months of 2023.
After exporting surplus metal for two years, the Chinese market seems to be struggling to find enough to deliver into the Shanghai squeeze.
The widening cash incentive for exchange delivery should in theory suck any available metal into ShFE warehouses, but it remains to be seen just how much is actually available.
And will it be enough to alleviate the squeeze on the big short?
LONDON TIGHTENING
The Shanghai price surge has generated a sympathy move in London, albeit muted by the absence of a big short position holder to chase.
The London Metal Exchange (LME) three-month lead price spiked to an eight-month high of $2,301 per ton on Friday but has since flopped back to $2,215.
Spreads have been tightening since mid-August and the cash premium over three-months delivery widened to $40.75 per ton at the Monday close. But that's still modest relative to the $100.50 premium seen as recently as June.
The London market has also been characterised by low stocks for many months. Headline inventory has rebuilt from the distress levels seen at the start of the year but only to a modest 55,350 tons.
Most of this year's arrivals have been either Chinese or Taiwanese metal. The two producing nations accounted for 51% of all LME warranted stocks at the end of July, attesting to both direct and displacement impacts of China's exports to Taiwan.
With mainland Chinese producers now rushing to deliver metal to the Shanghai market, there is a strong possibility that China's export flows will slow in the next few months, excepting the tonnage already at sea.
Has the Western supply chain recovered sufficiently to live with reduced Chinese exports?
Tightening LME spreads suggest the market is not entirely confident.
Everything of course depends on how the Shanghai squeeze plays out and whether the big short can get out.
($1 = 7.2999 yuan)
The opinions expressed here are those of the author, a columnist for Reuters. |
