As inventories disappeared outside China, the world looked to them to do something they have not done in great quantity since 2007, export.
By Bentley Atteberry & The Myst Metals Team
January 2022,
As the electricity price shocks, particularly in Europe, continue to rage on, the commentary has centered around Aluminium, Zinc, and general manufacturing output. What about Lead (Pb) though? After all, Lead and Zinc are considered co-products. The warehouse inventories of Lead in London Metal Exchange approved warehouses hit multi-year lows just like metals such as Zinc as production smelter cuts continue. Will the price of lead catch up to the recent moves seen in Aluminium and Zinc or will Chinese exports plug the shortfalls? Merchants and smelters on the mainland have certainly given it a shot as China exported the most refined lead in a month since 2007 this past October.
While the price of 3-month lead on LME rose 15.5% in 2021, how it got there involved idiosyncratic stories of its own. During the mid-summer parts of Germany and Belgium witnessed heavy rainfalls. This caused damage at Ecobat’s Solberg lead smelter in Germany eventually causing them to shut and declare force majeure. At 155,000 tonnes of annual capacity, the Stolberg smelter is responsible for roughly 8% of the EUs demand needs (Fastmarkets reported in October that Stolberg will remain shut until at least Spring 2022). The supply fears rose further in fall of last year when European gas and electricity prices began to skyrocket. During that period, Glencore announced they may halt production at their Portovesme smelting operations on Sardegna which. Thankfully for lead, it is not nearly as energy intensive to produce as Zinc or Aluminium and in November Glencore announced they were putting their Portovesme operations on care and maintenance "until such time that there's a meaningful change in power market prices," however, their lead smelting operations just north of Portovesme in San Gavino would not be impacted.
Unfortunately, the issue is a bit deeper rooted. In some regions outside of China refined lead production has been on the decline. For instance, the United States no longer produces primary lead despite still mining at one of the largest Zinc and Lead mines globally in Red Dog. On top of that, Clarios’ 100,000 tpy secondary smelter in North Carolina closed for good in March 2021. This has left a fair-sized shortfall in many regions outside of Asia and it is no wonder LME lead time spreads underwent some of their most extreme moves in decades with regional premiums blowing out to new all-time highs.
The unique part of the physical squeeze on the LME in Europe and North America is what was happening in China during that period. As is shown in the first chart, lead on the Shanghai exchange also moved up with LME lead over the summer, however this was not due to tight domestic markets. In fact, social inventories (SHFE deliverable grades plus onshore logistical warehouse inventories) in China ballooned to new all-time highs.
It was like a dream for some of the smelters who could operate at high rates and make a profit by simply delivering to local logistical warehouses. This resulted in speculation of when merchants would move these inventories offshore and to where. Shipping and logistics issues perhaps made it take longer for this shipments to occur, but finally in August China reported net exports of refined lead for the first time since 2018. The taps really opened in September with the most net exports since November 2007 and then further accelerated from there.
Of the roughly 83,450 tonnes exported offshore from China in September through November, nearly all went to the United States (36,972), South Korea (13,626), Republic of China (12,156), and the Netherlands (11,000). All four of these locations contain LME Warehouses and for three of them, the flows to the warehouses was quite clear. After all, South Korea and Republic of China warehouses are closest for onshore smelters or merchants to export to.
The notable exception to flows of these exports into Exchange Warehouses is the United States. Despite a record export amount of lead from China to the United States, the exchange warehouses in North America remain barren (China has not exported refined lead to the United States since 2019 and has not exceeded 1,000 tonnes in a full calendar year since 2015). The best explanation for this is the lead went directly to the starved consumer’s hand for use. This goes to show just how short of refined product consumers are in the United States.
While the shift to exports has been a slight relief to low supply markets in other regions, particularly the United States, much more metal will need to continuously flow out of China in the future to keep the other regions supplied. There are no more significant visible stockpiles to fall back on at this point and demand for the soft metal does not appear to be waning anytime soon either.
With that said, it remains to be seen if onshore smelters will operate at high enough rates to afford to export. A flurry of new secondary smelters came online during 2021 in China, so capacity is not the issue, profitability is. Secondary lead refining tends to be energy intensive and pollution emitting. Additionally, secondary smelters need to buy recycled products as their inputs. These inputs have somewhat dwindled, and costs have gone up (China recently announced a potential cut of their 8% import tariff to recycled batteries to help alleviate the shortage).
This means that their margins tend to be much thinner than primary smelters who can benefit from small amounts of by-products such as silver. It is not uncommon for secondary smelters to be operating at negative margins. When this occurs, they will typically just produce to fulfill long term contracts which means they are not producing excess metal to export or even deliver to a local warehouse.
All in all, high prices typically cure the profitability issues for smelters and incentivize them to operate at higher rates. Moving forward, it is tough to picture a scenario where the rest of the world does not need lead from China. While this may not cause explosive upside moves in Lead such as Zinc witnessed last fall, it may provide a floor for price provided that inventories of refined product and inputs remain low and costs remain high.
By Bentley Atteberry & The Myst Metals Team
Myst Capital offers market research and commentary. Our market research is intended to simply be insights, commentary and research for those who are interested in this information. This research is not a solicitation for investment with Myst Capital nor should such market research be construed as trading advice to buy or sell any specific financial investment. The above commentary, insights, and research may or may not fully represent the opinions of the entire Myst Capital team and is not intended to be indicative of any investments.
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