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RPT-COLUMN-Lead and zinc miss out on the supercycle party: Andy Home

Mon, 10th May 2021 02:00

(Repeats column filed on May 7 without changes. The opinions
expressed here are those of the author, a columnist for
Reuters.)

* LME metals relative performance: https://tmsnrt.rs/3uuTQeh

* ILZSG zinc market balances: https://tmsnrt.rs/3nVl9Mk

* ILZSG lead market balances: https://tmsnrt.rs/3nTNKSn

By Andy Home

LONDON, May 7 (Reuters) - A rising tide lifts all boats but
some are heavier than others.

Industrial metals are glowing white hot in a fusion of
post-pandemic manufacturing recovery and an emerging narrative
of a commodities supercycle.

Copper has hit all-time highs above $10,000 per tonne, with
London Metal Exchange (LME) three-month metal last trading at
$10,350. Tin hit a 10-year high on Thursday and aluminium is
charging up towards its 2018 peak of $2,718, last trading at
$2,530 per tonne.

But not every metal is on a supercycle surge.

Lead and zinc have been lifted by the broader metallic rally
but seem reluctant participants. While the copper price has more
than doubled from its COVID-19 low point in March 2020, zinc has
appreciated by a more modest 58% and lead by just 30%.

The reason, as the International Lead and Zinc Study Group
(ILZSG) has noted, is that both markets recorded big supply
surpluses last year and are on course to do the same again this
year.

Moreover, neither fits well into the supercycle narrative,
leaving the two metals the ugly sisters at the supercycle ball,
just as they were during the last price party in 2009-2010.

HEAVY WEIGHTS

The refined zinc market recorded a supply-demand surplus of
486,000 tonnes last year and is forecast to record another hefty
surplus of 353,000 tones in 2021, ILZSG's latest twice-yearly
assessment found.

Lead production, meanwhile, exceeded usage by 172,000 tonnes
last year and will do so again this year to the tune of 96,000
tonnes, ILZSG said. It will be the third consecutive year of
oversupply.

Zinc mine production was hit hard by lockdowns in supplier
countries last year, falling by 4.9% relative to 2019. But the
world's smelters managed to lift metal production by 1.6%, even
as usage slumped.

Lead production - both mined and refined - fell last year
but demand fell harder, unsurprisingly given the metal's
exposure to the automotive sector.

Critically, China has not come to the rescue by hoovering up
the rest of the world's surplus metal as it has in other
markets, including copper and aluminium,

China's net refined zinc imports fell by 6% to 512,000
tonnes last year. It was the second consecutive year of decline.

Net imports of refined lead have collapsed over the last two
years from 102,000 tonnes in 2018 to just 17,000 tonnes in 2020.

Last year's surplus metal, it follows, is still in storage,
albeit not fully statistically visible.

LME zinc inventory rose by 150,000 tonnes last year but
there was a shadow build of 100,000 tonnes in off-warrant stocks
- metal warehoused with explicit contractual reference to
potential LME delivery.

The LME zinc market gets the occasional sharp reminder of
surplus in the form of concentrated deliveries on to LME
warrant, such as the 105,800 tonnes that hit the system over two
days in January and the similar 31,700-tonne burst last month.

SUPERCYLE STRAGGLERS

Physical surplus is weighing down both metals, neither of
which has an obvious tie-in to the electrification and
decarbonisation drivers that have set other metals abuzz.

Indeed, in the case of lead, the metal would seem to be an
obvious loser in the transition from internal combustion engines
to electric vehicles, even if its usage in stationary battery
storage is a forgotten part of the green story.

Zinc batteries are an expanding part of the battery
landscape but still represent a small component of a usage
profile that remains dominated by galvanising steel.

Both metals will continue to benefit from a global
manufacturing recovery but neither is likely to generate the
same investment excitement rolling over other battery metals
such as lithium and cobalt.

Lead and zinc look set to be the supercycle stragglers, just
as they were last time.

The China-led supercycle of the 2000s saw copper peak at its
previous all-time high of $10,190 per tonne in February 2011.
Zinc's all-time high came in 2006 and lead's one year later in
2007. Both rose with the 2009-2010 price tide but without
getting close to their previous summits.

RELATIVE VALUES

Zinc's supply-usage cycle is out of sync with most of the
other metals currently enjoying an "old-economy" resurgence.

That means that lead's cycle is equally out of kilter since
just about all the world's primary lead comes from zinc
deposits.

Zinc is the dominant sister both geologically and in the
trading arena.

In the ever-popular relative-value trade between the two
metals, lead tends to be the bear component. Zinc's premium to
lead is around $750 per tonne.

That wide gap seems at odds with the ILZSG's forecasts since
relative to global usage - 13.2 million tonnes in the case of
zinc last year and 11.5 million for lead - the zinc market would
appear to be carrying the heavier weight of surplus metal.

Lead's large discount is also surprising since, in contrast
to zinc, the market shows signs of physical tightness.

U.S. premiums are at nine-year highs, according to
Fastmarkets, as the shuttering of a secondary smelter in South
Carolina leaves buyers exposed to rolling disruption in the
freight sector.

The discrepancy is down to investors' focus on the zinc raw
materials story at the expense of what's happening in the
refined segment of either market.

The zinc concentrates market is much tighter than anyone
expected it to be after zinc's bull surge over 2017-2018.

The anticipated wave of mine supply has failed to
materialise and following COVID-19 lockdowns, is still running
late.

The high zinc premium is predicated on this raw materials
constraint, which affects lead less because it needs less mined
material to balance what is largely a secondary supply chain.

The focus on zinc mine supply, however, leaves the
relative-value trade open to unforeseen developments in the
refined metal segment of the markets, such as the mass arrival
of zinc stocks in LME warehouses or signs of stress in lead's
physical supply chain.

Zinc and lead look set to continue fighting it out in this
long-running reverse beauty contest. The price gap between the
two will tell you which is winning.

The main bull party is taking place somewhere else.

(Editing by Barbara Lewis)

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