SHANGHAI, Mar 16 (SMM) - The Chinese market was closed in early February for the CNY holiday, and the US dollar index rose sharply during the holiday amid expectations for US interest rate hike, weighing LME lead below $2,200/mt. Dragged down by falling LME lead, the domestic lead prices plummeted after the holiday, and the spot lead prices once fell below 15,000 yuan/mt to 14,800 yuan/mt. Later, lead prices rebounded under the cost support of secondary lead, and moved upwards at the end of the month amid Russia-Ukraine geopolitical conflict.
Entering March, the Russia-Ukraine war tightened energy supply, and higher raw material costs due to the VAT on lead-acid battery scrap sustained the increase in lead prices. Base metals prices rose across the board amid strong bullish sentiment, with nickel leading the gains. As of March 8, LME lead and the most-traded SHFE lead contract hit a high of $2,700/mt and 16,465 yuan/mt respectively. Base metals prices pulled back and were once again dominated by fundamentals after the LME and SHFE tightened regulations to stem irrational price surge. Lead prices fell to around 15,000 yuan/mt.
In terms of fundamentals, with fading impact of holiday factor, both supply and demand in the lead ingot market are expected to increase in March. There will be a lower risk of growing lead inventory.
Factors that will affect lead prices include:
1. Lead consumption has entered the off-season.
March-May is the traditional off-season for lead-acid battery market. Some lead-acid battery companies have launched sales promotions, and the orders are modest for now. At present, the operating rates of lead-acid battery companies range from 70% to 90%. Battery makers may adjust their production plans if the end demand declines further, which will drag down lead consumption.
2. The possibility of exporting lead ingots.
LME lead inventory was less than 40,000 mt, while the social inventory of lead ingots in China was close to 110,000 mt. The SHFE/LME lead price ratio once hit a low of 6.1, allowing the export profits of lead ingots to exceed 1,000 yuan/mt. Ocean shipping is still the biggest factor that affects exports. In light of container shortages and high shipping costs, it is expected that lead ingots will not be exported until around the end of the month at the earliest.
3. Russia-Ukraine geopolitical conflict.
According to customs data in 2021, Russia accounted for 22% of China’s lead concentrate imports. After the Russian-Ukrainian war broke out, many European countries and the US imposed economic sanctions on Russia. In particular, since Russia was kicked out of the SWIFT banking system, the imports of lead concentrates from Russia encountered settlement issues. Besides, as the priority was given to the transport of military supplies, the railway shipments of lead concentrates were also hindered. The imports via Manzhouli port are mainly by railway, triggering concerns of tighter lead concentrate supply, and this may benefit lead prices.
The short-term lead prices will be dominated by fundamentals. The cost support to secondary lead will be limited. The positive impact of geopolitical conflict will be intertwined with the negative impact of sluggish consumption. In this context, lead prices will continue to fluctuate within the current range in mid-to-late March, with spot lead expected between 15,000-15,500 yuan/mt.
