LONDON (Reuters) - Healthy demand for batteries from auto makers and a narrowing market surplus is likely to give lead prices a boost this year despite surging exchange inventories and higher supplies from Australia.
Demand for lead is less cyclical than that for most other base metals as about 40 to 50 percent is for replacement batteries, which makes it very resilient.
Analysts also expect demand for new batteries to rise this year as car sales jump because of financial incentives and stronger global economic growth in emerging market economies such as China and India.
"Lead demand has held up better than consumption of other metals ... Lead mine supply is not abundant, so prices should respond to the better demand backdrop," said Michael Widmer, analyst at Bank of America.
"This has been heavily influenced by relatively steady offtake (usage) from replacement batteries, which account for 50 percent of all lead usage."
Bank of America expects global car sales to rise 8 percent this year to 61.59 million units.
Global lead demand this year is estimated at about 8.7 million tonnes compared with 8.2 million tonnes in 2009. About 80 percent is used by battery producers.
Benchmark lead on the London Metal Exchange at around $2,221 a tonne is up more than 160 percent since hitting $850 a tonne in December 2008 when markets started to fear economic recession could turn into a 1930s style depression.
Earlier this year lead hit $2,690 a tonne, its highest since May 2008, as investors betting on economic recovery piled into industrial metals.
"The sense is that the worst is over, things can only get better, but it is worrying that a cold winter has not translated into significantly better demand," said Neil Hawkes, analyst at industry consultants CRU Group.
"LME stocks continued to rise all the way through the autumn and winter ... A possible explanation is that battery producers did build up stocks and have been happy to run them down."
News that Canadian miner Ivernia expects its restarted Magellan lead mine in Australia to reach full production by the end of the third quarter briefly damaged sentiment.
Ivernia expects to produce about 60,000 tonnes of contained lead in concentrates in 2010 and expects that to ramp up to 85,000 tonnes a year from 2011 onwards.
"We had already accounted for the ramping up of that project (Magellan) in our numbers," said Daniel Major, analyst at RBS.
"You've got a number of big project closures coming up, including Brunswick. We do see stocks continuing to build for lead, but you have to look at the relative size of the market."
Xstrata's sizeable Brunswick mine in eastern Canada is due to become depleted in 2011. It produced around 66,500 tonnes of lead in concentrate last year.
Stocks of lead in London Metal Exchange warehouses at above 170,000 tonnes are at their highest since the middle of 2003 and four times the level seen in November 2008.
But RBS in a recent research report said its estimate of total global -- LME, producer and consumer -- lead stocks at above 405,000 tonnes represent 2.4 weeks of consumption compared with 4.4 weeks for copper and 8.7 weeks for aluminium.
That is perhaps why many are talking about a lower surplus for the lead market this year and a deficit in 2011.
A Reuters survey carried out in January forecast a lead market surplus of 62,500 tonnes this year and a deficit of 52,000 tonnes in 2011. Prices are expected to average $2,252 a tonne this year.
"The longer term outlook looks good, we're seeing very good demand for autos and other transport vehicles in the emerging world," said Dan Brebner, analyst at Deutsche Bank.
Chinese car sales in February, up a hefty 55 percent from a year earlier, partly because of government policy incentives, neatly illustrate the point.
Investors betting on stronger lead demand have been piling into LME lead contracts. Last week open interest surged to 91,680 lots or 2.3 million tonnes, the highest since Oct. 2008.
"Open interest is up more than 20 percent since late January," said Dan Smith, analyst at Standard Chartered. "The car sales boom in China is tremendously supportive for lead."