LONDON - Premiums for physical lead in Europe have collapsed this month as record high futures prices have deterred buyers at a time of rising local supply, traders say.
A fall in Chinese exports after the imposition of a 10 percent export tax, historically low lead stocks in London Metal Exchange (LME) warehouses, as well as robust demand from China have driven global lead prices to new peaks.
‘The physical lead market in Europe has been quite badly damaged by the level of the LME price,’ a physical trader said. ‘People just stopped buying. Merchants with battery grade material had to ship the metal to the Far East just to get rid of it.’
The three-months futures price for the metal, used extensively in batteries, rallied to an all-time high of $3,890 per tonne on Oct. 11, more than double its level at the start of the year.
But the price has since lost around 10 percent and now trades around $3,515 after stocks of the metal—which were only enough for one day’s global consumption in early October—doubled to 40,000 tonnes over the past few weeks.
Analysts and traders have been increasingly citing a discrepancy between the prices of material in the European physical lead market and that of the LME.
Merchants quoted duty-paid lead premiums in Rotterdam at around $70-80 above the cash lead price, compared to $130-180 in the beginning of October.
Physical traders said they had not observed a genuine shortage of the material in Europe while the backwardation in lead—the premium for cash material over the three-month price—rose to $111 per tonne in early October, its highest since March 1996. It has since declined to $26.
‘Some players have held metal off LME warrants and doing so helps to boost the price. So the price rise has been a bit of fiction,’ the trader added.
LME data in early October showed more than 90 percent of the available, or ‘on warrant’ lead stocks in the Exchange’s warehouses and cash positions were held by a single market participant, which many analysts cite as one of the reasons behind the price surge.
‘Lead is less liquid compared to copper or aluminium, so it less able to absorb serious flows of cash,’ said Leon Westgate, analyst at Standard Bank.
He added that demand had shifted from Europe to Asia, particularly China, with its fuelling appetite for electricAl bicycles which will boost the need for batteries.
‘In the short-term, I think tightness is a bit out of the market,’ another physical trader said.
‘Demand in Europe has been a bit weak with most of the consumers covered and there is just enough supply, Europeans are not short of material,’ he said. Ivernia’s big Magellan mine in Australia has been shut since April because of health concerns, which forced it to stop exporting lead from the port of Esperance.
Magellan accounts for 3 percent of the world’s mined lead.