Since June, tensions in domestic lead raw material supply have intensified, causing reductions in ingot production. Concurrently, there has been a surge in capital inflows into the SHFE lead contracts, with open interest reaching a historical high of 215,000 lots. During this period, the most-traded SHFE lead contract peaked at 19,560 yuan/mt, the highest since July 10, 2018. Meanwhile, overseas lead ingot inventories have risen for ten consecutive trading days, up 46,500 mt, which led to a sharp decline in LME lead prices, dropping to as low as $2,128.5/mt. This disparity has widened the SHFE/LME lead price ratio, thereby opening the import window for lead ingots into the Chinese market. Following a peak, the total open interest in SHFE lead contracts saw a rapid exit of capital, and SHFE lead showed a trend of rising and then falling.
In early July, a decrease in production by secondary lead smelters, along with rising scrap battery costs, pushed SHFE lead prices upward. By July 10, SHFE lead reached a new high since July 5, 2018, at 19,820 yuuan/mt, with the SHFE 2407 lead contract approaching 19,900 yuan/mt. As mid-July approached and the lead ingot import window opened, the influx of imported lead eased domestic supply constraints, leading to a decline in lead prices. The market's focus for late July will be on assessing the potential for further price increases.
From a supply perspective, July experienced fluctuating production levels of primary and secondary lead. Notably in Anhui, the principal region for secondary lead production, many medium to large smelters have either reduced or halted production, with production estimated to drop over 10,000 mt MoM.
Regarding raw materials, the widened SHFE/LME lead price ratio has facilitated the import of lead concentrate, with a noticeable rebound in imports of low-silver lead ore. According to SMM research data from July 5, lead concentrate inventories at Lianyungang and Fangchenggang, two major ports, reached 32,000 mt, up 13,000 mt WoW. This surge in ore arrivals at ports may help alleviate some domestic raw material supply tensions. However, scrap battery supply remains tight in July. Upcoming policies, including "reverse invoicing" and the "Fair Competition Review Regulations" set for August, might further increase tax costs for secondary lead. Currently, scrap battery prices have hit a historical peak, with SMM reporting the average price of scrapped e-bike batteries at 11,900 yuan/mt on July 10, and price trends continue to be uncertain.
Demand side, as the lead-acid battery market moves from its off-season to peak season, and with lead prices exhibiting strong fluctuations, downstream companies are continuing to produce based on sales while actively managing raw material and finished goods inventories. Currently, there hasn't been a noticeable increase in demand for replacements in electric bicycles and automotive batteries, with some companies, particularly export-oriented ones, reducing production. This reduction is due in part to the widening price gap between domestic and international markets and challenges in exporting batteries.
Import side, since July, the profit margins for importing lead ingots have fluctuated between 100 and 500 yuan/mt, leading to stronger expectations for lead ingot imports. SMM research conservatively estimates that July's lead ingot imports will range between 10,000 and 20,000 mt. Should the profit margins for imports increase further, the potential for even higher import volumes remains. This increase in imports is expected to exert significant downward pressure on lead prices this month.
In summary, domestic lead ingot supply remains tight in July, exacerbated by rising prices for raw materials such as scrap batteries, which contribute to strong fluctuations in lead prices. With the import window open, it's crucial to monitor the actual volumes of imported lead and their effect on the domestic supply shortfall. There is a risk of lead prices peaking and subsequently declining towards the end of July. It is anticipated that the SHFE lead main contract will range between 19,200 and 20,200 yuan/mt, while spot lead prices are expected to be between 19,200 and 19,850 yuan/mt during this period.
