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Testing times for lead. Neil Hawkes - CRU. 13 th Asian Battery Conference, Macau, China (1-4 September 2009). What goes up…. $ per tonne – LME 3-months lead price (daily). $1,000 level. …came crashing back down…. $ per tonne – LME 3-months lead price (daily). $1,000 level.

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Testing times for lead

Testing times for lead

Neil Hawkes - CRU

13th Asian Battery Conference, Macau, China (1-4 September 2009)


What goes up…

$ per tonne – LME 3-months lead price (daily)

$1,000 level


…came crashing back down…

$ per tonne – LME 3-months lead price (daily)

$1,000 level


…but regaining some lost ground this year

$ per tonne – LME 3-months lead price (daily)

$1,000 level


Presentation outline
Presentation outline

Collapse – story behind price fall to late 2008 low

Recovery – story driving price rise in 2009

Outlook – where do prices go from here ?


Collapse in lead prices
Collapse in lead prices

Lead industry fundamentals


Strong global lead demand growth in mid-2000s…

‘000t lead consumption – annual total (global)

‘000t lead – yr-on-yr chg

Annual - LHS

Trendline growth

Yr-on-yr change - RHS


…slower growth in 2007-2008

‘000t lead consumption – annual total (global)

‘000t lead – yr-on-yr chg

Annual - LHS

Trendline growth

Yr-on-yr change - RHS


Much weaker demand performance once China is separated

‘000t lead consumption – year-on-year change

China

Rest of the world


Global refined lead output growing at quicker pace…

‘000t lead – yr-on-yr chg

‘000t lead production – annual total (global)

Annual - LHS

Trendline growth

Yr-on-yr change - RHS


…with RoW rejoining China on upward path

‘000t lead production – year-on-year change

China

Rest of the world (RoW)


Market moved back into surplus in 2008…

‘000 tonnes of refined lead

…turns to surplus in 2008

Record deficit in 2004…


Collapse in lead prices1
Collapse in lead prices

Lead industry fundamentals – recent swing from deficit back into surplus is latest in a cyclical pattern

External influences


Investment funds have played a major role in scale of price swing
Investment funds have played a major role in scale of price swing

Retreat from commodities driven by:

Financial crisis and economic slump – switch to safer assets

Relatively small reallocation of vast pool of fund money had big impact on metal prices…

…particularly one as illiquid as lead


Fund mood map reveals switch to more bearish blue tactics in 2008 across lme complex
‘Fund mood map’ reveals switch to more bearish ‘blue’ tactics in 2008 across LME complex


Lead’s star performance crashes back to earth ‘blue’ tactics in 2008 across LME complex

LME 3-months prices, index to 1 August 2003* = 100

Lead

Nickel

Zinc

Copper

Tin

Aluminium

* Approximate starting point of LME metals price rally


Collapse in lead prices2
Collapse in lead prices ‘blue’ tactics in 2008 across LME complex

Lead industry fundamentals – recent swing from deficit back into surplus is latest in a cyclical pattern

External influences - investment fund money flowing out of wider commodity complex has exaggerated scale of downswing in lead prices


Presentation outline1
Presentation outline ‘blue’ tactics in 2008 across LME complex

Collapse – story behind price fall to late 2008 low

Recovery – story driving price rise in 2009

Outlook – where do prices go from here ?


Investor appetite has returned to commodities
Investor appetite has returned to commodities ‘blue’ tactics in 2008 across LME complex

Return to commodities driven by:

Belief that worst ravages of economic slump and credit crunch over – switch to riskier assets

Betting early ‘green shoots’ will translate into more solid economic growth – China joined by the rest of the world

Once again, relatively small reallocation of vast pool of fund money has had relatively big impact on prices



Lead and copper vie for best performers on LME this year buying since April 2009

LME 3-months prices, index to 2 January 2009 = 100

Copper

Lead

Zinc

Tin

Aluminium

Nickel


Recovery in lead prices
Recovery in lead prices buying since April 2009

External influences - investment fund money flowing back into commodities has exaggerated scale of upswing in lead prices

Lead industry fundamentals – what physical evidence is there to support investor enthusiasm ?


Batteries account for over three-quarters of global lead demand

* 2005 estimates

Data:CRU report – ‘What is the future for lead consumption? (2007)’


Batteries account for over three-quarters of global lead demand – SLI replacement ~40%

* 2005 estimates

Data:CRU report – ‘What is the future for lead consumption? (2007)’


And Chinese demand has continued to grow this year… demand – SLI replacement ~40%

‘000t lead consumption – year-on-year change


…but the rest of the world continues to fall away… demand – SLI replacement ~40%

‘000t lead consumption – year-on-year change

China

Rest of the world


…leaving global demand falling for the first time since 2001

‘000t lead consumption – annual total (global)

‘000t lead – yr-on-yr chg

Annual - LHS

Trendline growth

Yr-on-yr change - RHS



More subtle trimming of secondary lead output
More subtle trimming of secondary lead output 2001

Alongside the more widely reported primary cuts, more subtle trimming of secondary lead output at FWW smelter has been key

Faced with weaker sales, smelters unwilling to chase the last tonne of scrap too hard…

…particularly amid higher scrap prices


So, Western primary plummet and secondary slip this year… 2001

‘000t lead production – year-on-year change


…China still growing, but bigger drop in RoW… 2001

‘000t lead production – year-on-year change

China

Rest of the world


…leaving global lead output falling for first time since 2001

‘000t lead – yr-on-yr chg

‘000t lead production – annual total (global)

Annual - LHS

Trendline growth

Yr-on-yr change - RHS


Chinese switch from exporter to importer driven by wider Chinese price premium over LME

‘000 tonnes refined lead

$/t

Chinese net trade in refined lead (LHS)

Net exports

Net imports

Chinese lead price premium over LME lead cash price (RHS)


Higher chinese imports but mainly for accumulation
Higher Chinese imports – but mainly for accumulation Chinese price premium over LME

Widespread stockpiling of local production has inflated local prices

Most of higher imports reflects opportunistic arbitrage buying than any genuine urgent consumption need

Higher Chinese prices prompting primary supply response

Alongside slower summer demand, lower local premium reducing inflow

China to remain more significant net importer…

…playing major part in reducing scale of FWW surplus


Market surplus shrinking in 2009, mainly in West Chinese price premium over LME

‘000 tonnes of refined lead

2009


LME stocks climb in 2009 Chinese price premium over LME

$ per tonne – monthly average

‘000t lead – end of month

LME cash price - LHS

LME stocks - RHS


Recovery in lead prices1
Recovery in lead prices Chinese price premium over LME

External influences - investment fund money flowing back into commodities has exaggerated scale of upswing in lead prices

Lead industry fundamentals – are mostly supportive of higher prices, but not to the full extent that they have rallied


Presentation outline2
Presentation outline Chinese price premium over LME

Collapse – story behind price fall to late 2008 low

Recovery – story driving price rise in 2009

Outlook – where do prices go from here ?


So where next
So where next? Chinese price premium over LME

Fund activity will continue to determine scale of price moves

BUT…. lead’s own fundamentals will determine the direction

Supply is responding to weaker demand…

…but still no more than hope that lead demand may start to recover anytime soon outside China

Still a lead market surplus

Ebb and flow of fund money will continue to pull lead prices around in wide trading range

In such volatile trading, further price spikes higher into $2,000s seem almost inevitable…

…but dips down below $1,500/t also still possible


And reasons to be bullish in the longer term
And reasons to be bullish in the longer-term ? Chinese price premium over LME

  • Lead industry supply/demand dynamics will ultimately determine lead prices in the longer-term…

  • Series of structural changes that depressed prices have eased…

  • …replaced by more bullish dynamics:

  • Cost of producing lead is higher

  • Stronger demand growth, driven by China

  • Primary lead struggle to fill ‘gap’

  • Market imbalances larger and longer will fuel greater fund interest, making for greater price volatility


Price to remain cyclical but in higher range than before
Price to remain cyclical, but in higher range than before Chinese price premium over LME

?

$ per tonne – LME cash lead price (annual average )


Thank you for listening

Thank you for listening Chinese price premium over LME

Neil Hawkes, Lead market analyst - CRU

Tel no. +44 20 7903 2101

Email. [email protected]


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