Analyst: Lead price surge based on fundamental turnaround

Friday, July 11, 2008

The recent surge in lead prices "reflects a visible turnaround in the fundamentals," Barclays Capital commodities analyst Gayle Berry told BNamericas.

The cash price for lead has increased nearly 30% over the last week, closing at US$2,005.50/t, or US$0.9097/lb, Friday on the London Metal Exchange (LME) compared to US$1,564.50/t cash on Monday (Jul 7).

"Chinese import buying has strengthened. Cancelled warrants on the LME, which basically show how much metal is going to be leaving the LME, have tripled in the past week and most of that metal we believe is destined for China," Berry said, noting the contrast from China's typical role as a net exporter of lead.

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"We believe China is going to start importing more and more lead given that production in the country is pretty much flat, but consumption is continuing to expand at a healthy pace. And that is a bullish development for international prices," the analyst noted.

Another indication that the Chinese market has begun to tighten up is the nearly US$800/t premium over LME prices that lead is trading at on Chinese markets, while physical premiums have jumped 80% over the past two weeks.

Barclays believes lead prices will go higher still given that the lead market is "balanced at best."

Meanwhile, high concentrate prices for lead and provincial Chinese governments' attempts to change value-added tax systems have made it more expensive for lead smelters to operate, curtailing production, Berry explained.