Lead To Average USD2,300/tonne in 2015

BMI View:  Lead prices will push higher over the coming months as consumption growth outstrips production growth, resulting in increasingly deep lead market deficits.

Short-Term Outlook (three-to-six months)

Lead prices will gather strength after lacklustre performance in H114 and could head up to USD2,300/tonne in the coming months. In line with our prediction in June, lead prices have made a bullish break above technical resistance and look set for strong performance (See: 'Monthly Metals Strategy', June 2014). We expect gains across the industrial metals complex over the next three months as China's most recent PMI print points towards some recovery in Chinese manufacturing. China's HSBC Flash Purchasing Managers' Index (PMI) easily outgunned consensus expectations of 49.7 for June, posting at a surprisingly strong 50.8. The lead market will experience increasing tightness over the coming months as mine supply and refining capacity come offline.

Price Strength Ahead
Three Month LME Lead, Monthly Chart, USD/tonne
BMI Lead Price Forecast
  Spot 2014 2015 2016 2017 2018
USD/tonne, ave 2,207 2,150 2,300 2,350 2,400 2,400
Bloomberg Consensus - 2,178 2,365 2,375 2,512 2,535
Note: Lead Three Month LME contract. Correct as of July 23 2014. Source: BMI, Bloomberg

BMI View:  Lead prices will push higher over the coming months as consumption growth outstrips production growth, resulting in increasingly deep lead market deficits.

Short-Term Outlook (three-to-six months)

Lead prices will gather strength after lacklustre performance in H114 and could head up to USD2,300/tonne in the coming months. In line with our prediction in June, lead prices have made a bullish break above technical resistance and look set for strong performance (See: 'Monthly Metals Strategy', June 2014). We expect gains across the industrial metals complex over the next three months as China's most recent PMI print points towards some recovery in Chinese manufacturing. China's HSBC Flash Purchasing Managers' Index (PMI) easily outgunned consensus expectations of 49.7 for June, posting at a surprisingly strong 50.8. The lead market will experience increasing tightness over the coming months as mine supply and refining capacity come offline.

Price Strength Ahead
Three Month LME Lead, Monthly Chart, USD/tonne

Long-Term Outlook

Lead prices will head higher over the coming quarters to average USD2,300/tonne in 2015 and USD2,350/tonne in 2016, from a forecast average of USD2,150/tonne this year. This represents an upward revision of our previous forecasts of USD2,200/tonne for 2015 and USD2,300/tonne for 2016.

While we expect lead consumption growth to be slower over the next five years compared to the previous five years as Chinese economic growth slows, lead production growth will slow more sharply than consumption, causing the global market to slip into deficit. We anticipate the global lead market to move from being roughly in balance in 2013, to a deficit of 3kt in 2015, deepening to a deficit of 172kt by 2018. Reduced capital expenditure in the mining sector will reduce lead mine supply growth, while refining capacity growth will also come under the hammer as the world's largest producer, China, implements stringent environmental policy affecting lead refineries. Consequently, we expect China to gradually ramp up lead imports over the coming quarters to address its growing domestic shortfall.

BMI's lead price forecasts sit below Bloomberg consensus (see table at top of article). This is consistent with our below-consensus view on Chinese economic growth and therefore lead consumption. A slowdown in Chinese economic growth will prevent the lead market from tightening as much as would otherwise be the case and keep prices in check. China remains the world's largest consumer of refined lead, at 42% of global consumption in 2013.

In the context of the wider industrial metals complex, we expect lead to be a strong performer over coming quarters. Demand for lead will be less affected by a slowdown in Chinese economic growth than other industrial metals due to its primary usage in the autos sector in lead-acid batteries. As China rebalances its economy away from fixed asset investment towards private consumption, prices for other industrial metals particularly iron ore and copper will underperform lead.

Lead Will Outperform
Ratio: Three Month LME Lead/S&P GSCI Industrial Metals Index

Production Growth To Experience Sharp Slowdown

Global refined lead production will slow sharply as both mined and refined capacity come offline over the coming quarters. We expect global lead production growth to average 1.9% y-o-y over 2014-2018, compared to growth averaging 5.1% y-o-y over the previous five years.

Slipping Into Deficit
Global - Lead Production Balance & Stocks To Use Ratio

China will remain the crucial driving force behind refined lead production, accounting for over 40% of global production. In 2013, Chinese refined lead production declined 1.7% y-o-y, which weighed on global supply growth resulting in an equal decline of 1.7% y-o-y. In the USA lead production growth was stagnant at 0.2% y-o-y, while in Germany contraction was intense at -5.6% y-o-y. We forecast Chinese refined lead production growth to average 3.6% y-o-y from 2014-2018, while we forecast growth to average -0.3% y-o-y in the USA, 0.6% y-o-y in the United Kingdom and 1.5% y-o-y in Germany.

The drastic fall in the number of operational lead recycling companies over recent years will continue to limit the volume of lead being recycled. For instance in 2012 the number of lead recycling plants in China fell from 280 to 30.

Lacklustre Production Growth
Select Countries - Refined Lead Production Growth (% change y-o-y)

Consumption Growth From Autos Sector

Global lead consumption growth will moderate from an average of 5.0% y-o-y over the past five years to average 2.1% y-o-y over 2014-2018. Nevertheless, this consumption growth will firmly outpace production growth. The main driver of lead consumption will be lead-acid battery production for use in the autos sector. We forecast strong growth in autos production in China, with vehicle production growth set to average 7.4% y-o-y from 2014-2018. Our forecasts for solid autos production growth in the USA and Germany also bolster the outlook for lead consumption. We anticipate vehicle production in the USA to average 2.9% y-o-y and in Germany to average 2.3% y-o-y between 2014 and 2018.

Batteries Dominate
Global - End Uses of Lead By Sector

India will import increasingly large tonnages of lead as domestic production fails to keep pace with demand from the country's growing autos sector. We anticipate lead consumption in India to grow on average 6.8% y-o-y over 2014-2018 compared to an average of 1.1% y-o-y over the previous five years.

China In The Driving Seat
Select Countries - Vehicle Production (% Growth y-o-y)

Upside Risks To Price Outlook

The Chinese government's push to close lead smelters for environmental reasons may be more aggressive than we currently anticipate. This would amplify the tightness in the lead market by boosting Chinese imports and push prices higher over our forecast period. On the demand side, the growing popularity of e-bikes, coupled with a stronger than expected rebound in automobile consumption from Europe, may outpace production growth and warrant significant price gains.

Lead Forecasts
Indicator 2012 2013e 2014f 2015f 2016f 2017f 2018f
Price, USD/tonne, ave 2,077 2,155 2,150 2,300 2,350 2,400 2,400
Production, thousand tonnes 10,541 11,224 10,971 11,241 11,655 11,883 12,291
Consumption, thousand tonnes 10,481 11,225 10,972 11,243 11,717 11,987 12,463
Inventories, thousand tonnes 639 638 636 633 572 468 296
Stocks-to-Use, % 6.1 5.7 5.8 5.6 4.9 3.9 2.4
Stocks-to-Use, wks 3.2 3.0 3.0 2.9 2.5 2.0 1.2
Production Balance, thousand tonnes 60 -1 -1 -2 -61 -103 -171
e/f = BMI estimate/forecast. Source: USGS, ILZSG, Bloomberg, BMI

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Related sectors of this article: Commodities, Industrial Metals, Lead
Geography: Global, China
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