Review of the Lead Supply-Demand Pattern in the Past Five Years: 2025 May Be the "Match Point" Year for Long-Term Contract Negotiations [SMM Analysis]

Entering November, as per tradition, upstream and downstream enterprises in the lead industry chain have successively started long-term contract negotiations for lead concentrate and lead ingots for 2025. Compared to previous years, the market generally believes that the 2025 long-term contract negotiations will be another challenging year. This "challenge" mainly lies in the stalemate in bargaining between buyers and sellers, potentially leading to multiple rounds of negotiations.

From the perspective of manufacturing enterprises, the demand for long-term contracts is primarily to ensure the stability of production, including raw material supply and prices, and to reduce transaction risks. Reviewing the long-term contract negotiations over the years, the focus of the bargaining between buyers and sellers has invariably been on the forecast of the supply-demand pattern, costs, and policies for the coming year.

High-Demand Years for Long-Term Contracts: 2020-2021

From 2020 to 2023, new capacity in lead smelting enterprises was concentratedly released, especially in secondary lead enterprises, with new capacity exceeding 1 million mt annually, reversing the tight supply pattern before 2020 and shifting to a supply surplus trend. During the period of significant lead ingot accumulation in 2021, multiple delivery warehouses frequently expanded, and the total inventory of SMM lead ingots in five regions once reached a historical high of 216,000 mt. During this period, due to the ample supply of lead ingots, primary lead and secondary lead markets generally traded at a discount. The ex-factory discount of primary lead against SMM 1# lead price exceeded 200 yuan/mt, and the ex-factory discount of secondary refined lead against SMM 1# lead price approached 600 yuan/mt, resulting in long-term contract negotiations for lead ingots in these two years generally being in the form of significant discounts.

Turning Point Year: 2022

Profits at the ingot end declined, and the timing for exports matured. While new ingot capacity was being put into production annually, the secondary lead smelting industry also transitioned from high profits to low profits, hovering around the breakeven point. After the rapid development of the secondary lead industry in 2020-2021, the production of secondary lead saw negative growth for the first time in 2022, with secondary lead enterprises actively seeking a multi-metal comprehensive utilisation transformation model. Meanwhile, the divergence in lead ingot inventory trends domestically and abroad, with ultra-low overseas inventories, created favorable conditions for the export of domestic lead ingots. The shift of lead ingot inventory abroad marked a turning point in the narrowing of discounts in long-term contract negotiations.

High-Demand Years for Long-Term Contracts: 2023-2024

By 2023, the new capacity of lead smelting enterprises reached its peak. According to an SMM survey, the production of primary lead and secondary lead increased by 12.76% and 8.61% YoY, respectively, with total lead production reaching a historical high. Simultaneously, the demand for raw materials such as lead concentrate and scrap also peaked. Notably, in Q3 2023, the concentrated commissioning of new capacity in lead smelting enterprises led to a surge in demand for raw materials, driving up lead-acid battery scrap prices, continuously lowering lead concentrate TC, raising raw material costs, and transmitting these costs to the ingot end. Lead prices soared to a nearly four-year high, sparking market imagination about the upward trend in lead prices.

In 2024, the contradiction in raw material supply intensified, coupled with increased tax costs such as "reverse invoicing" for battery scrap. Lead concentrate TC fell to a historical low, while battery scrap prices climbed to a historical high, leading to normalized losses in lead products for smelting enterprises, resulting in a significant reduction in lead production for the year. According to SMM statistics, the cumulative production of refined lead from January to October 2024 decreased by 12.73% YoY. The supply gap of lead ingots emerged, pushing lead prices to reach the 20,000 yuan/mt mark in July 2024, a six-year high, heightening the sentiment to stand firm on quotes for long-term contract prices among miners and smelters for the following year.

"Match Point" Year: 2025

2025 is highly likely to become the match point year for long-term contract negotiations. On one hand, the contradiction in the supply of raw materials such as lead concentrate and scrap is expected to ease relatively but not fundamentally change, with lead production expected to stop declining and start increasing. It is worth noting that profits and production are positively correlated. On the other hand, the pressure on the growth expectations of domestic lead consumption is significant, with policy guidance anticipated. In terms of exports, lead-acid battery exports have shifted to enterprises going global. Given that China's lead capacity is the most concentrated globally, it remains the core area of the global raw material supply contradiction, indirectly affecting the price advantage of China's lead-acid battery exports.

Meanwhile, it is important to note that as of November 21, LME lead inventory reached 275,800 mt, while SMM domestic five-region social inventory was 64,000 mt. This significant inventory difference may provide certain conditions for lead ingot imports next year. Additionally, in April 2024, Zhang Ming, Deputy General Manager of the Shanghai Futures Exchange, publicly stated that SHFE would promote the inclusion of secondary lead in the delivery system. We need to continue to monitor its progress in 2025.