The lead market has sprung back into life after months of slumber, with London Metal Exchange
(LME) three-month metal <CMPB3> touching a 16-month high of $2,307 per tonne on Tuesday.
The price action has helped lead close a widening gap with zinc, a divergence that was attracting increasing analyst attention.
It just remains to be seen whether lead can maintain this level of activity. The London market seemed unimpressed, knocking the price back to $2,230 on Wednesday morning.
But then it wasn't the London market that kicked lead into life in the first place.
DIVERGENCE
Trading zinc and lead as a relative value pair has long been a favourite pastime on the LME, partly because of the supply overlap between the two metals. More often than not, they co-exist in the same deposits in the ground and are extracted from the same mines.
It's perhaps surprising, therefore, that lead has been unaffected by zinc's bull narrative of pending mine closures and shift to supply shortfall. After all, every zinc mine that closes removes some lead supply as well.
But while zinc has been the second-best performer in the LME base metals pack after nickel this year, lead has done little more than shuffle sideways, only moving into positive territory over the last few days.
This divergence has been manifest in zinc's widening premium over its sister metal, an inversion of the normal relationship in recent years.
At one stage last week, that premium stood at close to $160
per tonne, the widest since April 2010. By yesterday's close it
had contracted to $99, a level that is still highly unusual by
the standards of the last few years.
UNLOVED
This divergence is odd, given that both markets are expected
to be in supply deficit this year. The International Lead and
Zinc Study Group (ILZSG) at its April meeting forecast a 49,000
tonne deficit for lead and a 117,000 tonne deficit for zinc.
Moreover, lead has less inventory overhang to act as a
cushion against supply shortfall, in theory offering an even
more bullish narrative than that of zinc.
"Stocks measured as weeks of consumption are likely to fall
to very low levels, amongst the lowest in the LME complex", over
2015-2016, according to Leon Westgate, an analyst at Standard
Bank London, writing in the bank's quarterly commodities review.
Yet while zinc has soared, lead has sagged. Why?
Its underlying supply-demand dynamics may be as bullish as
those of zinc, but there has been an absence of signals to
corroborate the bull narrative.
LME lead stocks, for example, have been largely static over
recent weeks, with minimal activity either in or out. Contrast
that with LME zinc stocks, which have been trending steadily
lower, with each daily exchange report providing a reminder of
the apparent market deficit.
Then there is China. The country's imports of zinc rose by
38 percent to 375,000 tonnes over the first half of this year.
When it comes to lead, though, China has been a net exporter.
The volumes may not be huge, just 15,000 tonnes or so over the
first six months of 2014, but this is metal that is coming out
despite a prohibitive 10 percent export tax.
No matter that LME zinc stocks may be going no further than
off-market storage or that the zinc entering China is going no
further than a bonded warehouse to act as collateral for the
shadow credit market.
In terms of bull perception, zinc is generating the "right"
signals and lead the "wrong" signals.
Hence the collective lack of investor interest in the LME
lead market so far this year, "mild indifference" verging on
"outright neglect", to quote Standard Bank's Westgate. LME
volumes have been humdrum, and open interest dropped to a
two-year low last month.
The divergence between the two metals seems to be largely
down to the simple fact that lead is unloved.
CHINA BULLS
That may be changing, or at least in China it may be
changing.
As the graphic below shows, open interest on the Shanghai
Futures Exchange (SHFE) lead contract has exploded over the last
few days. It ended last week at 24,080 lots. As of Tuesday's
close that figure had risen to over 51,000 lots. Volumes have
gone equally supernova over the same time frame.
This surge in interest echoes a similar phenomenon in the
SHFE zinc contract last month as Chinese investors collectively
picked up the bull baton from London.
In lead, though, it looks very much as if it is China that
is leading a still reluctant LME market higher.
This raises several interesting questions.
Is it another sign of the growing power of China's fund
players to influence global markets? Back in March a bear attack
on the copper market by Chinese funds sent both SHFE and LME
prices tumbling.
Is the Shanghai metals market now evolving from follower to
leader of the London market?
And what do Chinese lead bulls know that the rest of us
apparently don't? Are they also just playing a relative trade
against zinc? Or are they taking a more strategic view of the
metal's prospects in China?
The country's de-stocking cycle this year has been one of
the main reasons for the lack of investment interest in the lead
market. If that cycle is about to turn, it makes sense that
Chinese investors might be the first to notice and to place
their bets.
Source: Reuters
