Limited upward room in SHFE lead prices

SHANGHAI, Aug 8 (SMM) – SHFE lead performed strongly this week but further upward room for the September contract is likely to be limited as primary lead production recovers and downstream demand remains sluggish, SMM believes.

The SHFE 1809 contract jumped 2.6% and closed at 18,455 yuan/mt on Wednesday August 8, leading the increases among SHFE base metals. Last week, the contract performed weakly and tumbled below 18,000 yuan/mt.

SMM believes that low operating rates across secondary lead smelters buoyed SHFE lead prices. Many secondary lead smelters operated at low levels from the middle of July as profit margins shrank and temperatures soared in the summer. Some smelters even gave employees a month-long break, at the end of July. 

Margins began to dwindle from the start of July, from 800-1,000 yuan/mt in June to 300-400 yuan/mt in mid-July. This week, margins fell further and did not exceed 100 yuan/mt, as lead prices fell and as battery scrap prices held steady.

Cuts across secondary lead smelters are likely to be offset as primary lead production recovers. SMM expects the operating rate across Chinese primary lead smelters to increase 2.46 percentage points from July to come in at 63.29%. This is likely to grow primary lead output by 9,000 mt month-on-month in August.

Social inventories of primary lead in Shanghai and Guangdong rose last week, up some 3,860 mt from a week ago to 14,800 mt as of Friday August 3.

Downstream demand remained weak and lead-acid battery plants have not begun to purchase large amounts for restocking. As lead prices rebounded, some plants made on-demand purchases at low prices this week. Meanwhile, traders were keen to offload their cargoes and lowered offers. Spot offers in Shanghai were heard flat or even at discounts against the August contract this week, compared to premiums of 100-200 yuan/mt in mid-July.

The escalating US-China trade disputes also kept investors on the sidelines. On Tuesday, Washington unveiled the next round of Chinese imports to face tariffs, and detailed a list of $16 billion worth of goods that will be hit with 25% tariffs from August 23.

SMM sees limited further upward room for the SHFE 1809 contract and expects it to trade rangebound at 18,000-18,600 yuan/mt in the second half of August.