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LONDON, Aug. 9 (Reuters) – London’s main market took a walk on the wild side last week.
The London Metal Exchange’s (LME) three-month lead first rose and then collapsed as time gaps hit their highest levels in a decade.
Turbulence peaked on Wednesday as bulls and bears beat it during the monthly LME options expiration day. The bears appear to have gained, with price rising from Wednesday’s high of $ 2,412.50 per tonne to $ 2,275.00 currently as spreads ease again.
However, LME stocks are still very low and the physical supply chain remains very stressed, providing plenty of scope for further positioning conflicts.
The whole world lead seems to be in China, where the warehouses are packed. Some of that surplus is expected to flow through the arbitrage window, but so far there have been few signs of movement.
Until Chinese exports flow in, the already marked imbalances in risk in the global lead market could become even more extreme.
TIGHT MARKET
On Wednesday, LME traders were vying for a slice of call options – 800 lots (20,000 tonnes) – perched on the strike price of $ 2,400 per tonne.
The three-month cash flow gap
Part of the problem is low inventory. LME’s most recent daily reports show two entities each sitting on 30-40% of available stock and a dominant position in long-term cash equivalent to over 90% of the shares.
LME stocks currently total only 58,500 tonnes, down nearly 75,000 tonnes from the start of the year. Excluding the 18,925 tonnes awaiting physical loading, the available tonnage is only 39,575 tonnes, close to the decade low of 36,650 tonnes observed in 2019.
Beyond the London market, European supply has been hit by the outage of the German foundry in Stolberg, which declared force majeure last month due to flooding.
The US market is even shorter in metal, with buyers paying record premiums of 15 to 18 cents per pound ($ 330 to $ 400 per tonne) over LME to obtain physical lead, according to Fastmarkets.
Supply stress in North America will not be helped by downsizing operations at Teck Resources’ Trail smelter in Canada, which last year produced 73,000 tonnes of refined metal. The lead smelting activity was interrupted due to poor ambient air quality caused by forest fires.
CHINA’S SURPLUS
Compare and contrast with the main Chinese market.
Metal stocks registered with the Shanghai Futures Exchange (ShFE) have jumped 136,000 tonnes since early January to reach 181,391 tonnes, the highest level recorded since the launch of the lead contract in 2011.
Unsurprisingly, there isn’t a hint of tension on the front end of the futures curve and the outright price action has been largely mundane and sideways.
The price of LME lead is still up 10% from the start of the year even after falling late last week. The Shanghai price, on the other hand, only rose 1%, as large excess inventory curbed speculative minds.
Behind the stock mountain hides a 21% jump in Chinese refined lead production in the first half of the year, the highest production growth rate of any major industrial metal.
Obviously, domestic demand has not been able to keep pace, leaving a lot of surplus metal in ShFE’s warehouses.
So far at least he’s showing no signs of wanting to go anywhere.
Chinese refined lead exports totaled a meager 1,038 tonnes in the first half of the year, with only 51 tonnes released in June.
The country was a major importer over the period 2017-2019, but entries almost dried up, although they still exceeded exports in the first half of 2021 to the tune of 370 net tonnes.
The lack of response from exports is surprising, given the clear signs of supply difficulties emanating from both the LME contract and the physical market.
However, it should be noted that 91% of ShFE lead stocks are justified, suggesting that they may be sticky.
BRIDGING THE GAP
Arbitrage flows from China still seem the most likely salvation for major buyers elsewhere, especially those short on LME deadlines.
The international lead and zinc study group estimates a global supply surplus of 50,000 tonnes in the first five months of May, but significantly more metal than has surfaced in China, implying that the world outside of China is experiencing a supply deficit.
Foundry outages like those in Germany and Canada could not have come at a worse time as the supply chain prepares to meet automotive demand for replacement batteries and new lead-acid batteries.
Add to that the continued disruption of global freight, especially containerized freight such as that used to transport refined metals, and the main market outside of China is experiencing a perfect storm.
China can save the day, but until it does, the lead could be a wilder time.
(Edited by Kirsten Donovan)
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