(The opinions expressed here are those of the author, a
columnist for Reuters)
* LME zinc and lead relative value trade: https://tmsnrt.rs/34qNdz8
LONDON, Oct 26 (Reuters) - The London Metal Exchange (LME)
zinc price last week touched a high of $2,596.50 per
tonne, the galvanising metal's strongest performance since May
The LME lead price, by contrast, has been moving in
the opposite direction and is now the clear under-performer of
the London base metals market.
These divergent fortunes are not unrelated.
The relative value trade between the two sister metals -
so-called because they are almost always found in the same
geological deposits - is a perennial favourite among traders.
Indeed, the trade can be a price driver in itself with lead
often-as-not sold as an expression of a bullish view on zinc.
Right now zinc's premium stands at around $765 per tonne,
the widest sisterly gap since the second quarter of last year,
when it topped out at just over $1,000.
The divergence looks extreme.
The International Lead and Zinc Study Group's (ILZSG) latest
forecasts for both metals are gloomy in the extreme but in this
particular ugly contest, zinc's prospects look particularly
COVID-19 HITS BOTH DEMAND AND SUPPLY
Every industrial metal has experienced a COVID-19 demand
shock this year as manufacturing activity ground to a near
standstill in the early months of lockdown.
Zinc demand is expected to contract by 5.3% and lead demand
by 6.5% this year, according to the ILZSG.
However, these two metals have also experienced severe
supply-side disruption as well.
Zinc mine production is seen sliding by 4.4% and lead by
4.7% due to lockdowns in key producer countries such as Peru,
Bolivia and Mexico. Moreover, the Group warned, "a resumption to
pre-pandemic production levels is proving to be a challenging
process at a number of major mining operations."
Raw material constraints have impacted refined metal
production as well, albeit much more significantly in the lead
Global refined zinc production is now expected to grow by
just 0.9% this year, down from a forecast of 3.7% growth when
the ILZSG last updated its numbers in October 2019.
Refined lead production won't grow at all but rather will
contract by 4.3% this year.
The difference is down to lead's heavy reliance on secondary
feeds in the form of used car batteries. Scrap recycling chains
broke down under lockdowns, knocking out smelters such as
Germany's Nordenham, which the ILZSG notes suspended production
This smelter effect plays out in the ILZSG's market balance
estimates for each metal.
Both will generate supply-demand surpluses this year and
next. But relative to the size of market, that in zinc is larger
at a cumulative 1.08 million tonnes - 8% of this year's expected
global demand - than the forecast 468,000 tonnes in lead - 3.6%
of this year's consumption.
A key difference between these two markets and copper is
that China is not clearing excess metal accumulated in the rest
of the world.
While the country's imports of refined copper are running at
super-hot levels this year, Chinese imports of both zinc and
lead are subdued despite raw materials constraints of mined
concentrates and recyclable batteries respectively.
Net imports of refined zinc totalled 288,000 tonnes in the
first eight months of this year, down 29% on last year and the
lowest count for the first eight months of any year since 2015.
Refined lead imports have fallen by a steeper 80% and have
totalled just 16,000 tonnes so far this year.
Surplus, in other words, is building without any Chinese
Moreover, more of that surplus is showing up in the LME's
physical delivery network, suggesting the market is less
comfortable in holding off-market stocks than, say, eminently
Registered zinc stocks have mushroomed to 220,975 tonnes
from just 51,200 tonnes at the start of 2020.
Lead stocks have "merely" doubled to a current 128,175
tonnes, largely thanks to 20,000 tonnes of arrivals at Hamburg
in Germany, a possible reflection of the trials and tribulations
of the Nordenham plant where sales talks are continuing.
Low Chinese import demand and the growth in visible surplus
means market optics are negative for both metals.
CLOSING THE GAP
Given the ILZSG's statistical snapshot of the two markets'
fundamentals, the yawning price differential looks overdone.
That doesn't automatically mean that the gap will close
because of the differing engagement of investment funds in the
Zinc's out-performance has been driven by speculative
interest in Shanghai, where zinc is often traded as a ferrous
derivative on the basis that a lot of zinc is used to galvanise
steel for use in the construction and automotive sectors.
Western investors have been happy to buy into the price
strength in what is the LME's third most liquid market after
aluminium and copper.
Lead, so far at least, hasn't enjoyed the same Shanghai
booster and fund money outside of China is much more wary of
lead due to its lower liquidity base and its toxic reputation.
When lead does make it into the headlines, it tends to be for
the wrong reason, such as last week's class action lawsuit
against Anglo American for legacy contamination.
It doesn't help that lead, to quote Tom Mulqueen, analyst at
LME ring-trader AMT, simply doesn't have any "longer-term buzz
factor". The electric vehicle (EV) narrative that is lurking in
metals such as nickel doesn't play out well for lead, where
demand is dominated by batteries for internal combustion
It's an oversimplification of lead's role in battery storage
- even EVs use a lead battery for non-drive functions - but the
result is lead is "a pariah metal for investors," Mulqueen said
at last week's LME Week virtual seminar.
Funds are often more comfortable shorting lead as the flip
side of the relative value trade with zinc than they are buying
lead against zinc weakness.
This always tilts the trade in favour of zinc, whatever the
fundamental signals are suggesting.
If the divergence between the two sisters is to close, look
to Shanghai, where speculators are more likely to play either
metal from both long and short sides.
Worth noting right now is the sharp build in open interest
on the Shanghai Futures Exchange's lead contract, which at
65,077 contracts is the highest it's been since the first week
A simultaneous slide in zinc open interest suggests that
Chinese players at least are starting to mind the gap.
(Editing by David Evans)