LONDON (Reuters) – Zinc price on the London Metal Exchange (LME) CMZN3 last week hit a high of $ 2,596.50 per tonne, galvanizing metal’s strongest performance since May 2019.
The price of LME lead CMPB3, on the other hand, has moved in the opposite direction and is now clearly underperforming the London base metals market.
These divergent fortunes are not unrelated.
The relative value trade between the two sister metals – so called because they are almost always found in the same geological deposits – is a perennial favorite among traders.
Indeed, trade can be a price factor in itself, with lead often being sold as an expression of a bullish outlook on zinc.
Right now, the zinc premium is around $ 765 per tonne, the largest sibling spread since the second quarter of last year, when it exceeded just over $ 1,000.
The divergence seems extreme.
The latest forecast from the International Lead and Zinc Study Group (ILZSG) for the two metals is extremely bleak, but in this particularly ugly competition, the outlook for zinc looks particularly daunting.
For a chart on Mind the gap between sister metals, lead and zinc:
COVID-19 REACHES BOTH DEMAND AND SUPPLY
Every industrial metal has suffered a COVID-19 demand shock this year as manufacturing activity almost came to a halt in the first months of the lockdown.
Zinc demand is expected to contract 5.3% and lead demand 6.5% this year, according to ILZSG.
However, these two metals also suffered serious disruptions on the supply side.
Zinc mining production is expected to decline 4.4% and lead 4.7% due to lockdowns in major producing countries such as Peru, Bolivia and Mexico. Further, the group warned, “a recovery to pre-pandemic production levels is proving to be a difficult process in a number of major mining operations.”
Raw material constraints have also had an impact on the production of refined metals, albeit much more significantly in the lead market.
Global refined zinc production is now expected to grow just 0.9% this year, down from a growth forecast of 3.7% when the ILZSG last updated its figures in October 2019.
The production of refined lead will not increase at all but will instead contract by 4.3% this year.
The difference is due to the heavy reliance of lead on secondary power supplies in the form of used car batteries. Scrap metal recycling lines collapsed under lockdowns, shutting down foundries such as Germany’s Nordenham, which the ILZSG notes suspended production in July.
This smelting effect is reflected in the ILZSG market equilibrium estimates for each metal.
Both will generate excess supply and demand this year and next. But relative to the size of the market, the zinc market is larger with 1.08 million cumulative tonnes – 8% of expected global demand this year – than the forecast 468,000 tonnes of lead – 3.6% of the forecast. consumption this year.
A key difference between these two markets and copper is that China does not remove excess metal accumulated in the rest of the world.
While the country’s imports of refined copper reach very high levels this year, Chinese imports of zinc and lead are moderate despite the raw material constraints of mined concentrates and recyclable batteries respectively.
Net imports of refined zinc totaled 288,000 tonnes in the first eight months of this year, down 29% from a year ago and the lowest figure for the first eight months of any year since 2015.
Imports of refined lead have fallen by more than 80% and have totaled just 16,000 tonnes so far this year.
The surplus, in other words, is built without any Chinese relief valve.
Additionally, more of this surplus is showing up in the LME’s physical delivery network, suggesting that the market is less comfortable holding off-market stocks than, say, highly fungible aluminum.
Zinc stocks recorded have exploded to reach 220,975 tonnes, compared to only 51,200 tonnes at the start of 2020.
Lead stocks have “simply” doubled to currently 128,175 tonnes, largely due to 20,000 tonnes of arrivals in Hamburg, Germany, a possible reflection of the trials and tribulations at the Nordenham plant where trade negotiations are taking place. continue.
The weak Chinese import demand and the visible surplus growth mean that the market outlook is negative for both metals.
REDUCE THE GAP
Given the ILZSG’s statistical snapshot of the fundamentals of the two markets, the yawning price differential seems exaggerated.
This does not automatically mean that the gap will close due to the different commitment of investment funds in the two metals.
The outperformance of zinc was driven by speculative interest in Shanghai, where zinc is often marketed as a ferrous derivative on the basis that much of the zinc is used to galvanize steel for the construction and of the automobile.
Western investors were happy to take advantage of strong prices in what is the LME’s third most liquid market after aluminum and copper.
Lead, at least so far, hasn’t received the same Shanghai booster, and funds outside of China are much more wary of lead due to its weaker liquidity base and toxic reputation. When lead hits the headlines, it’s usually for the wrong reason, like last week’s class action lawsuit against Anglo American for legacy contamination.
It doesn’t help that lead, to quote Tom Mulqueen, analyst at LME ring-trader AMT, just doesn’t have a “longer-term buzz factor.” The electric vehicle (EV) narrative hiding in metals such as nickel does not work well for lead, where demand is dominated by batteries for internal combustion vehicles.
This is an oversimplification of the role of lead in battery storage – even electric vehicles use a lead acid battery for non-motor functions – but the result is that lead is “a pariah metal for investors,” he said. Mulqueen said at the LME Week Virtual Seminar last week.
Funds are often more comfortable shorting lead as a reverse of the relative value of zinc than they buy lead against weak zinc.
This always tips the balance in favor of zinc, regardless of the fundamental signals suggested.
If the divergence between the two sisters is to close, look towards Shanghai, where speculators are more likely to play the metal on both the long side and the short side.
Of note at this time is the sharp increase in open interest in the Shanghai Futures Exchange main contract, which at 65,077 contracts is the highest since the first week of January.
A simultaneous decline in open interest in zinc suggests that Chinese players are at least starting to worry about the spread.