Commodities | Aug 03 2007
By Chris Shaw
Lead prices have risen more than 100% already this year and the price is now at inflation-adjusted all time highs, reflecting what Barclays Capital suggests is a structurally tight market.
The group points out the driving force for prices so far this year have been supply disruptions, giving it confidence prices will again test their recent highs and likely overshoot before settling at still elevated levels.
Barclays has a one-month target price of US$3,600 per tonne and has no problem in recommending investors go long the metal, seeing scope for lead prices to eventually overtake zinc, its sister metal.
Part of its confidence is based on the fact the metal has yet to recover from years of structural deficits, leading Barclays to forecast several more years of concentrate shortages.
Also helping is the likelihood of further disruptions to the supply side, the group noting while a small surplus is expected for 2008 it would only take one mine or smelter closure to wipe this out and push the market back into deficit again.
Helping here is the fact lead among the base metals is the most susceptible to disruptions on the supply side as it has more environmental and therefore political issues surrounding its production and so has greater natural opposition to new projects or facilities.
Also supporting its view the market will remain fundamentally tight is the fact new polymetallic lead mines are likely to yield less metal and there are no lead only mines scheduled to be opened anytime soon, so while output may increase the rate of increase will fall.
There are no such problems on the demand side in the group’s view as while Western usage levels should remain steady in coming years Chinese demand growth is expected to be strong as more and more cars hits the streets in Beijing and Shanghai. Over the last five years Chinese vehicle growth has grown at an annual rate of around 20% and Barclays estimates it should continue at around 14% annually over the next five years.
Unlike in some metals such as nickel where higher prices spark increased substitution Barclays doesn’t see such an outcome with respect to lead, as the lack of alternatives to lead-acid batteries mean demand should be fairly inelastic with respect to the metal’s price.
All up, the group expects lead prices medium-term will remain above US$2,000 per tonne with average prices next year likely to be closer to US$2,200 per tonne. Volatility can be expected given the tight market fundamentals, so the group cautions there are likely to be periods when prices spike far above this level.