Producers often sell forward or take short positions to hedge their output, while speculators such as traders and funds have taken short positions that can be a bet on lower prices or an arbitrage play.
Large amounts of the battery metal have been sold on ShFE for delivery in October and November which have weighed on prices for those months.
But for September, expectations that holders of short lead positions will be forced to buy them back - known as a short squeeze - have already created a large price premium for September.
ShFE's website shows brokerage CITIC was holding 3.3 billion yuan ($454 million) worth of short lead positions on Wednesday Sept. 6, with most of it for October and November.
Major lead producers, including Henan Yuguang Gold & Lead Co told Reuters this week they had delivered some of their units to the warehouses registered with ShFE.
CITIC and Henan Yuguang Gold & Lead Co did not respond to requests for comment.
"It has been loss-making to smelt lead for quite a while," said a producer source, adding that his company would take the opportunity to sell at higher prices.
Lead prices for September delivery on ShFE climbed to 17,660 yuan on Monday to a contract high and a jump of 11% since over the past month. It was last at 17,100 yuan while the October and November contracts were around 16,860 and 16,750 yuan respectively.
The three sources estimate around 20,000 tonnes of lead will be delivered by contract expiry on Sept. 15, boosting stocks in ShFE warehouses by 40% to 71,761 tons.
Part of the problem is that only primary lead can be delivered against the ShFE contract, secondary lead is not eligible and half of China's lead output is recycled.
Both London Metals Exchange(LME) and Chicago Mercantile Exchange (CME) accepts delivery of secondary lead.
(Reporting by Julian Luk; Editing by Richard Chang)
By Julian Luk
