Lead To Be A Better Performer In 2011

This story features TERRAMIN AUSTRALIA LIMITED. For more info SHARE ANALYSIS: TZN

By Chris Shaw

In 2010 lead was close to the weakest of the base metals, delivering an essentially flat performance. This was somewhat misleading performance in the view of Barclays Capital, as fundamentals for the metal appear reasonably strong.

As Barclays notes, lead at present has an essentially negligible market surplus and a low stocks-to-consumption ratio of just 2.5 weeks. This implies a better performance should have been achieved last year, but Barclays suggests it was China, or in this case an absence of China, that was the reason the metal didn't do better.

Unlike most other commodities, China actually had a relatively muted impact on the global lead market in 2010, being a small exporter of 5,000 tonnes in the period. Barclays notes lead in refined form was in fact the only base metal where China was a net exporter last year, having been a net importer of around 130.000 tonnes in 2009.

According to Barclays, the swing in China's position in the metal from 2009 to 2010 was due in large part to de-stocking last year after a sizable build-up in inventories in both 2008 and 2009. As well, the Chinese market saw improved domestic supply performance. This meant China had little incentive to access international lead markets.

As demand growth in the OECD was not enough to offset supply growth outside of China there was a small rise in LME lead stocks in 2010, so Barclays suggests for the market to take on a more positive look in the coming year there needs be a reversal in China's market dynamics.

This is expected, Barclays taking the view 2011 will show little growth in Chinese domestic mine output. With demand expected to remain relatively stable this should make for a more constrained supply picture, driving an increase in Chinese lead imports.

Price support from a close to balanced global market will be greater, so Barclays sees scope for any supply disruption to easily push the lead market into a deficit. This leads Barclays to suggest lead is likely to move up the base metals performance ranks in 2011.

For investors looking for exposure to lead via listed Australian plays, Kagara Ltd ((KZL)), Perilya Ltd ((PEM)), Terramin Australia Ltd ((TZN)) and Compass Resources ((CMR)) are among those involved in the lead market.

The FNArena database shows Sentiment Indicator ratings on these companies of minus 0.5 for Kagara and 1.0 for Perilya. Neither Terramin nor Compass Resources are covered by any of the brokers in the FNArena database.

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