By Andy Home
LONDON (Reuters) – Lead and zinc may be geological sister metals but their market fortunes have been very different in recent months.
London Metal Exchange (LME) three-month zinc rallied to a 20-month high of $3,284 per metric ton in October on the back of an acutely tight raw materials market.
LME lead, by contrast, headed in the opposite direction, weighed down by a mountain of exchange stocks.
Zinc’s premium to lead stretched to over $1,000 per ton during the fourth quarter of 2024, the widest gap since February 2023.
Although the two metals mostly come from the same mines, divergent narratives of under-supply in zinc and oversupply in lead have caused funds to position accordingly and cement the price disparity.
Both metals are down on the start of January but zinc has fallen harder and the premium to lead contracted to $888.50 at the Friday close.
What happens next to the sisterly trade may be an ugly contest as zinc’s mine supply recovers and the lead glut grows.
ZINC SUPPLY STRESS
Zinc’s October rally contained an element of positional poker on the London market. The outright price high coincided with a sharp contraction in time-spreads, the cash-to-three months period flaring out to a backwardation of $63.50 per ton.
But that’s not to say that price move wasn’t underpinned by genuine tightness in the zinc concentrates. Indeed, the rally was partly triggered by another supply hit after fires at South African producer Sibanye Stillwater’s Century mine in Australia.
Global zinc mine production fell for the third straight year in 2024, forcing smelters to accept ever lower fees for processing concentrate into refined metal.
Chinese metal production was sliding even before a group of the country’s top 14 operators agreed in August to adjust operating rates in a bid to preserve margins.
The country’s refined zinc output tumbled by almost 7% year-on-year in 2024, according to local data provider Shanghai Metal Market.
Lower Chinese run-rates dragged the global zinc market into a supply-demand deficit of 33,000 tons in the first 11 months of the year, according to the latest assessment from the International Lead and Zinc Study Group (ILZSG).
LME zinc stocks, both registered and off-warrant, peaked at 367,000 tons in August and fell to 324,000 at the end of November.
LEAD GLUT
LME lead stocks have grown exponentially over the last two years. Combined on- and off-warrant inventory rose from just 29,000 tons at the start of 2023 to 305,000 tons at the end of November 2024.
The relentless inventory build was only briefly interrupted in August 2024, when China imported significant amounts of metal for the first time since 2019.
Indian brand metal has accounted for much of the increase, its share of registered LME stocks rising from zero at the start of 2023 to 52% at the end of 2024.
Who knew there was so much lead around?
The scale of stocks increase is puzzling, given the ILZSG assesses global supply and demand to have been almost balanced in the first 11 months of 2024.
Moreover, primary lead smelters are suffering from the same margin squeeze as zinc producers because of the overlap in the two metals’ mine production profile.
The most likely cause of the stocks surge is the opaque secondary production sector, which accounts for a much higher ratio of supply in the lead market than any other industrial metal.
Whatever the origin, the bearish optics of high and rising inventory has encouraged funds to take massive bets on still lower prices. Investment players are holding a record net long on the LME lead contract.
MINDING THE GAP
By contrast, funds are sticking with zinc’s bull narrative and are still significantly net long on the LME zinc contract.
However, the narrative is starting to shift.
Zinc mine supply is turning a corner and is forecast by ILZSG to recover strongly this year thanks to a combination of new mines and restarts of idled facilities.
Although global mine production was 370,000 tons lower in the first 11 months of 2024, monthly production started rising over the back end of the year.
If concentrates availability improves, zinc smelter output growth will regain momentum and zinc’s relative scarcity premium over sister metal lead should recede.
That is, if lead market optics don’t deteriorate even further. More zinc mine supply will inevitably mean more lead mine supply with the potential for further exchange stocks build.
Neither metal is blessed with particularly strong demand dynamics at the moment. Lead usage is dominated by demand for batteries in the automotive sector, where lithium-powered electric vehicles are driving sales growth. Around half of all zinc is used in the construction sector, which is weak just about everywhere, particularly in China.
ILZSG estimates that global zinc usage rose by a modest 0.7% year-on-year in January-November 2024, while lead usage fell by 1.3%.
With little excitement on the demand side, supply narratives will continue to play the dominant role in the relative value trade between the two metals.
But the geological link between lead and zinc means they will both be impacted by a recovery in mine production this year.
It’s just a matter of which proves most resilient in price.
The opinions expressed here are those of the author, a columnist for Reuters.
(Editing by Louise Heavens)
Comments