Going long on lead and short on copper continues to be a solid investment strategy in 2014, particularly as lead tilts toward a supply deficit and copper toward surplus, investment bank BNP Paribas said Thursday.
Despite lead's underperformance in recent weeks, "We continue to believe that lead's prospects are stronger than most, including, for now at least, those of zinc," Paribas analyst Stephen Briggs said Thursday in a report titled "Better Lead than Red." "Moreover, now that copper has recovered toward $7,000/mt, we are more confident than in March that it still has downside potential over the next three-four quarters."
With global lead demand likely to grow 4-5% both this year and next, he said, it will be hard for recycled-lead producers to keep up, yet on the mining side, "lead is usually only a byproduct and one that most firms are keen to avoid on environmental grounds."
And although lead output will not be hit as hard as zinc by pending large mine closures, he added, "Lead scarcely features among new mines. We believe the global lead market is entering a prolonged period of supply deficit ... and from a position where inventories are already quite low." COPPER'S SUPPLY/DEMAND IN SYNC
In contrast, Briggs said, the copper market is tipping into supply surplus in 2014 and 2015. Although the red metal is also expected to see healthy demand growth at 5% per year in that time, unlike lead, the supply side is expected to keep pace.
"Refined production growth will pick up smartly as mine output continues to increase strongly (albeit not at the pace of 2013) and smelters draw down the concentrate stocks that built up last year," Briggs said, and inventories in China are high.
"Although Chinese activity may continue to mask the underlying market balance, we expect visible stocks to trend back up in [the second half of] 2014 and 2015," he said.
However, despite copper's less impressive fundamentals, Briggs said he did not expect the red metal's price to fall below $6,000/mt this year, but said rallies above $7,000/mt would likely be short-lived.
Conversely, lead may hit $2,500/mt by mid-2015.
"So we retain our short copper versus long lead recommendation," Briggs said. "Patience may be required. And the trade is less attractive the further out it is initiated ... due to the very different shape of the two forward curves (backwardation for copper and contango for lead)."
He forecast the copper/lead price ratio would sink to 2.5:1 by mid-2015.
