THE LEAD PRICE DYNAMIC 13th ABC September 1-4 2009 Venetian Resort, Macau HELEN MATTHEWS Senior Metals Market Analyst firstname.lastname@example.org +44 (0) 1932 878000
THE LEAD MARKET DYMANIC > This presentation considers economic and technical indicators which can be used by lead market participants to determine the direction of future lead price movements
Contents • Introduction • Economic Indicators • Technical indicators • Summary
INTRODUCTION • The cost of lead is one of the largest raw materials costs faced by battery manufacturers. • Since 2006 the lead price has reached new and largely unexpected heights, driven by strong fundamentals and substantial investor interest. • The higher cost environment which grew from the upturn has not receded and will remain a challenge into the next decade and beyond with the lead price unlikely to return to pre 2005 levels. • Consumers need to have a greater awareness of the non-fundamental mechanisms which influence the lead price, as well as a better understanding of what instruments they can use to help them predict, and therefore manage, lead price fluctuations. • This paper aims to highlight the major indicators which can be monitored to determine the possible future direction of the lead price, including economic indicators and technical trading patterns.
ECONOMIC INDICATORS - INTRODUCTION • Economic indicators can be useful tools when trying to determine lead demand growth in the short, medium and longer term • Although these alone will not be indicative of price movements, when looked at in conjunction with fundamental issues they can be a useful pointer to the likely direction of price movements • During the current economic downturn, for example, economic indicators show the current level of contraction in key lead consuming regions which, when compared with supply availability, is a good indicator of refined stock levels, and therefore the direction of price movements • In addition, economic indicators can be used to assess medium and long-term growth potential in developing economies. A sharp upturn in lead demand growth, such as that experienced in China this decade, can have substantial implications on market balances and prices if the supply side of the market is unable to react quickly enough.
ECONOMIC INDICATORS – INDUSTRIAL PRODUCTION • An index designed to measure changes in the level of output in the industrial sector of the economy. The index is grouped by both products (consumer goods, business equipment, intermediate goods, and materials) and industry (manufacturing, mining, and utilities) (Federal Reserve Bank of New York definition)
ECONOMIC INDICATORS - GDP • Gross Domestic Product (GDP) is the total value of all goods and services produced by a given country in a given year • It is used to show the growth in an economy, and also to determine when an economy is in recession (defined as a decline in GDP for two consecutive quarters) • It is often used on a per capita basis, in other words dividing a country’s total GDP by the population, to allow comparisons with other countries. To enable a realistic comparison, long-term exchange rates are used to equalise currencies, known as purchasing power parity (PPP)
ECONOMIC INDICATORS - PER CAPITA GDP 2008 AND SHARE OF GLOBAL LEAD CONSUMPTION
ECONOMIC INDICATORS – CAPITAL SPENDING & OTHERS • Capital spending and investment is a useful measure of spending on assets including infrastructure such as schools, hospitals, new manufacturing facilities, power and transportation networks etc. • This can be useful in determining additional lead demand that may be generated by, for example, an upgrade of, or extension to a power network, or a new railway system. • Other indicators are less specific and although they may be useful for determining demand in other metals, for lead they are best used as a measure of general economic conditions. These include housing starts and unemployment amongst others.
TECHNICAL INDICATORS - INTRODUCTION • The systematic method of analysing financial instruments, including securities, futures and interest rate products, with only market-delivered information such as price, volume, volatility and open interest. The tools of technical analysis are measurements and derivatives of price, for example on-balance volume, price oscillators, momentum measurements and pattern recognition (International Federation for Technical Analysis Definition)
TECHNICAL INDICATORS - VOLUME • A measure of supply and demand that is independent of price. • Often used for confirming evidence of price trends and price reversal patterns. For any pattern or trendline penetration, a breakout with increasing volume is more indicative that prices will continue in the direction of the breakout than if the breakout is on low volume. • An increase in volume can be used to identify the relative enthusiasm of buyers and sellers and the direction of the price trend.
SUMMARY • Lead pricing has historically been determined by market fundamentals. The influx of investors into the market over recent years has resulted in new external pressures and influences on the lead price, at times resulting in a disconnect between pricing and fundamentals. • It is therefore no longer possible to predict lead price movements solely on market fundamentals. • Economic indicators such as GDP and IP alone will not be indicative of price movements, but when looked at in conjunction with fundamental issues they can be a useful pointer to the likely direction of future price movements. • Technical trading patterns give a more direct indication of price movements and can identify longer-term trends. Volume and open interest give a useful indication of current market sentiment. • Both economic and technical are merely indicative and should not be used solely as the basis of any business decisions. • But investors are here to stay!
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