Lead has been falling out of favor lately with speculative investors, compared with other base metals, Commerzbank analysts said in report Thursday, as there is some doubt whether lead will indeed shift into a production deficit this year, as has been forecast.
Commerzbank said investors' cooling interest in lead is evidenced by the sharp drop in net long positions in lead to just 3,373 at the end of October from nearly 25,700 contracts in August.
"To some extent the pessimism is justified, for it is questionable whether the lead market will show a production deficit of 38,000 tons this year as the International Lead and Zinc Study Group expects," the analysts said. "There is a fear that Chinese demand might cool further."
Some of the new market skepticism toward lead has to do with China's contribution to supply, the report said.
The analysts noted that, in the first nine months of this year, China's net refined lead exports already reached 25,000 mt, their highest point since 2007. "The high zinc prices are playing their part in the overproduction of lead in China because they stimulate production in the lead and zinc mines," Commerzbank said.
But the lead supply boom is poised to change, the report said. "The availability of lead concentrate in China is likely to decline soon; however, as many lead mines in China are shutting down their production for the winter."
In fact, the analysts noted that, even in the first nine months of 2014, China's output of lead concentrate was already 7.5% down on last year due to environmental inspections, consolidation in the mining sector and relatively low lead prices.
"Accordingly, stocks on the [Shanghai Futures Exchange] have plummeted by over half -- that is to say by over 72,000 tons -- as compared with their peak last year," they said. "Lead prices, which have fallen by 10% on the LME since the beginning of the year, probably take sufficient account of the negative news."
There is also potential for improving demand as the cold season approaches, the analysts added. "Since demand for batteries -- which accounts for the lion's share of lead demand -- is particularly high in winter, lead prices could even prove surprisingly 'positive.'"
