In August, SHFE lead prices fell over 7%, marking the largest monthly decline in six years. Weak fundamentals raise the question: what are the key points to watch in September? [Monthly Analysis]

Since July, domestic lead prices have been declining continuously, plummeting in early August and reaching a low of 17,040 yuan/mt, the lowest since April 25. Although lead prices recovered slightly afterwards, the monthly decline in August still hit a high of 7.59%. As of the close on August 30, the most-traded SHFE lead contract reported 17,345 yuan/mt, with a monthly decline of 7.59%, the largest since July 2018.

In the spot market, according to SMM spot quotes, August SMM 1# lead ingot spot price also showed a downward trend. As of August 30, SMM 1# lead ingot was quoted at 17,200 yuan/mt, down 2,200 yuan/mt from the end of July's 19,400 yuan/mt, a decline of 11.34%.

Fundamentals Review

Primary Lead:

According to an SMM survey, primary lead smelters in August mainly recovered production, bringing an increase of nearly 10,000 mt. As a result, the national primary lead production in August showed an upward trend, up 2.77% MoM to 315,500 mt. The increase mainly came from smelters in Henan, Hunan, Anhui, Inner Mongolia, and Yunnan as they resumed production after maintenance. However, it is worth noting that unexpected production reductions at smelters in Shaanxi, Shandong, and Jiangxi meant that August primary lead production was slightly lower than previous expectations despite the recovery trend.

Secondary Lead:

According to SMM surveys, secondary lead smelters faced increasing losses and production cuts in August, leading to a significant decline in secondary lead production, down 28.71% YoY. The main reason was the lack of significant improvement in the lead-acid battery market consumption in August, with downstream battery producers only maintaining necessary procurement. Additionally, high temperatures led to many factories taking high-temperature leave, causing a decline in operating rates and slow digestion of lead ingot inventories. Meanwhile, the favorable price and volume of imported lead ingots arriving before the end of July also pressured domestic lead ingots.

Domestic secondary lead smelters reported difficulties in sales, with high inventories of lead ingots; they had to offer substantial ex-factory discounts with tax against SMM 1# lead average price to turn around funds. The sluggish consumption amid the peak season and the ample supply of circulating lead ingots pressured lead prices, keeping substantial ex-factory discounts, causing secondary lead smelters to suffer losses and increase production cuts.

Inventory:

According to SMM data, SMM social inventory of lead ingots in five major regions in August showed a trend of rising first and then falling. On August 19, due to delivery factors, the social inventory of lead ingots rose to a monthly high of 64,900 mt as traders moved the goods to delivery warehouses. After the settlement of the SHFE 2408 contract, the delivered lead ingots re-entered the market, with large downstream enterprises intensifying their procurement, leading to a sharp decline in social inventory, reaching a four-year low. However, in late August, both primary and secondary lead enterprises were generally in maintenance, and downstream enterprises also saw widespread production reductions. The focus should be on the specific situation of the next round of inventory moves.

Downstream Consumption:

According to SMM surveys, in August, the weekly operating rate of SMM lead-acid battery enterprises showed a trend of falling first and then rising. In early to mid-August, due to the sharp decline in lead prices, dealers were highly risk-averse, with battery procurement essentially limited to necessities, causing increased inventory pressure and production cuts or shutdowns for lead-acid battery enterprises. The weekly operating rate of lead-acid batteries dropped, reaching a low of 67.01%, the lowest since May.

Later, with the gradual decrease in high temperatures, enterprises that had taken high-temperature leave resumed normal production, leading to an increase in the weekly operating rate of lead-acid batteries. However, by the end of August, even after the resumption of these enterprises, the operating rate did not return to full capacity, with most maintaining rates between 50-80%.

Overall, in early August, the domestic lead market saw an increase in supply from the recovery of primary and secondary lead smelters, leading to supply pressure and a drag on lead prices. By late August, the lead market's fundamentals turned to a state of weak supply and demand, with primary and secondary lead enterprises undergoing maintenance and downstream consumption showing no significant improvement, leading to continued pressure on lead prices.

September Lead Market Outlook

Entering September, the overall macro atmosphere remains weak, with non-ferrous metals under pressure. Lead prices declined further in early September amid a weak macro atmosphere and weak fundamentals, with intraday prices dropping to 16,280 yuan/mt on September 10, the lowest since March 28, 2024. Notably, this week is the week before the delivery of the SHFE 2409 contract, with increased warehouse transfers and deliveries from smelters to delivery warehouses, leading to a sharp rise in social inventory. As of September 9, SMM social inventory of lead ingots in five major regions had increased to 38,700 mt. Additionally, while lead prices fell, battery scrap prices had limited declines. With expanding losses in secondary refined lead, the production enthusiasm of secondary lead smelters was severely hit. Combined with the anticipated maintenance of primary lead smelters in early September, the supply situation of circulating lead sources may change. Before delivery, downstream consumers are expected to remain on the sidelines, with mediocre consumption performance, and traders will continue to move goods to delivery warehouses, potentially increasing social inventory further.

In late September, attention can be given to the recovery of consumption. On one hand, focus can be placed on the transmission cycle of the trade-in policies for electric bicycles and cars; on the other hand, the traditional peak season for downstream lead-acid battery consumption is approaching, and the possibility of inventory stocking for the National Day holiday should be noted. Additionally, from June to early August, the unfavorable SHFE/LME price ratio for lead ingots resulted in the loss of export orders. Currently, the ratio is slowly recovering, and future export orders for car batteries can be anticipated.

In summary, in terms of prices, SMM expects short-term lead prices to fluctuate downward. Key areas to monitor in late September include the recovery of consumption.