SMM Monthly Review: Lead Prices Will Remain Rangebound amid Long-Short Game

SHANGHAI, Aug 16 (SMM) - The Federal Reserve raised the interest rates in July, aggravating the worries about a global economic recession, and non-ferrous metals prices fell across the board. Among them, LME lead fell sharply and once touched a low of $1,784.5/mt, and SHFE lead also plummeted to 14,345 yuan/mt, a level below the break-even point of smelters. Hence the supply tightened amid production cuts. The consumption side, on the contrary, initiated a wave of centralised purchasing. As such, lead prices bottomed out with the dual impact from these two factors, and rose above 15,000 yuan/mt.

In August, geopolitical tensions in China and abroad have intensified. The escalation of energy supply problems in Europe greatly shored up the prices of crude oil and natural gas. Booming production cost have prompted some lead and zinc smelters to lower their production guidance. Lead prices went even higher amid the power rationing in summer. As of August 9, LME and SHFE lead stood at $2,184.5/mt and 15,450 yuan/mt respectively.

The macro front is expected to remain sluggish in mid-to-late August with subsiding impact on the metals market, and lead is expected to be mainly subject to the fundamentals.

On the macro front, the Fed's rate hike in July was in line with expectations, and the future rate hike path is expected to be dovish. In China, the Political Bureau of the Central Committee has disclosed the economic development targets for the second half of the year, enabling a rebound in industrial metal prices. Since last year, the global supply of natural gas and other energy sources has been quite tight, and fuel prices have risen one after another. After the outbreak of the Russian-Ukrainian conflict in February this year, energy was further in short supply, and its price continued to soar. The current geopolitical tension has disrupted the global supply chain. Therefore, the shortage of energy supply is unlikely to be addressed in the short term, while rising production costs will boost non-ferrous metals prices.

On the fundamentals, the lead-acid battery market has entered the traditional seasonal high on the consumption end in August and September, and the seasonal growth in consumption is expected to benefit lead prices. However, it is worth noting that this year, under the worries of the potential pandemic outbreak and the global economic recession, the traditional seasonal high is expected to be slightly quenched. Scenarios that the battery companies being out of stock or buyers lining up for goods may not stage this year.

In terms of supply, the output of primary and secondary lead is expected to add nearly 20,000 mt month-on-month, mainly due to the recovery of smelting activities following the maintenance. However, power rationing has been introduced in China amid high temperature weather. For example, secondary lead smelters in Anhui province are required to cut the power use, which has reduced the production by 10-30%. In addition, the impact of power curtailment also affects the production of downstream lead-acid battery companies, which may limit the increase in the production of lead-acid battery companies in August.

In addition, boosted by energy shortages, the LME lead rose strongly. Domestically, restricted by the slowdown in consumption growth, SHFE/LME price ratio is on the fall, and the lead ingot export window is about to open. After the SHFE 2208 lead contract is delivered, we need to pay attention to the possibility of subsequent lead ingot exports. If the export window opens, it may become one of the main factors boosting lead prices.

To sum up, the impact of bearish macro factors has been fading, and the supply and demand of lead ingots will both increase in August, but there has not been sufficient diving forces for lead ingot social inventory to remain on the downward track. As such, lead prices are expected to remain rangebound with the game between longs and shorts. If the export window opens, SHFE lead will get the opportunity to jump over 15,500 yuan/mt. It is expected that the spot lead price will move between 14,900-15,400 yuan/mt.