Sister act: lead’s time to shine?

The price of lead has increased by over 15% since the start of 2017 to over $2,300 per tonne, making it the best performing industrial metal of the year so far. Lead prices had a strong start to 2016 as well, but this quickly fizzled out while other industrial metals, specifically zinc surged higher through 2016 and into 2017.

Lead and zinc are commonly found in the same deposits with lead the “ugly sister” by-product to zinc. Since mid-2007 lead and zinc prices have, as their nicknames suggest been intertwined with lead at a slight price premium.

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Prior to the early 2000’s the price of lead typically traded at a significant discount to zinc, lead being buffeted by frequent hits to demand such as the removal of lead from use in petrol.

Since early 2016 though zinc prices have outperformed lead and gone on to a establish a significant premium. Zinc prices have been supported by the exhaustion of mines such as Century in Australia and Lisheen in Ireland and the decision by Glencore to mothball 500,000 tonnes of capacity at the end of 2015 (about 4% of global zinc capacity). All of these mines produce zinc but they also produce lead too.

If lead prices are to correct for the divergence between the two metals then it would need to rise towards $3,000 per tonne, a 30% increase on current levels.

The single most important commercial use of lead is in the manufacture of lead-acid storage batteries. Compared with other industrial metals, lead scrap accounts for a much higher proportion of total supply, but unlike other industrial metals the supply of lead from batteries is less price responsive, with batteries typically being scrapped when they fail under extremes of temperature.

The potential downside risk for both metals is Glencore. When will it decide to reactivate its capacity? With each mine (the mothballed capacity is spread over 4 mines) likely to take 9-15 months to reactivate Glencore’s CEO has suggested that they would bring them back one at a time. Enough to test the market, without causing it to collapse.

Watch out for more news and higher volatility in late February. This is when the International Zinc Conference is held in the United States and is the time of year when deals are completed in the refined metal market.

Seasonal trends suggest that lead could stabilise over the next couple months with July typically being the strongest time of year for the market.

For now at least zinc’s uglier sister has some catching up, but zinc is likely to continue to play the tune.

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Smeltdown: Philippines ban set to cut nickel supply

“Why is mining more important than people’s lives?

That’s what the Philippines environment minister had to say after ordering the closure of at least 5 nickel mines and suspending others including the country’s top gold producer for causing environmental destruction.

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Nickel prices were supported during 2016 on fears that the Philippines would carry out this pledge to put the environment before profits. In so doing though much of the supply of nickel from the main exporter to China could be cut off.

Nickel prices fell back earlier in January when the second largest exporter, Indonesia abruptly announced a partial lifting of its nickel ore export ban. However, the rules still appear relatively opaque and suggest that supply will only come back onto the market slowly.

Some 11 nickel mines have already been shutdown as part of the crackdown. Prior to the Philippines announcement there was an expectation that a further 20 mines could be under threat, so the fact that 5 have been ordered to close might represent something of a reprieve relative to market expectations.

For now at least it appears that nickel, mainly used as an anti-corrosive in steel alloys is set for a further squeeze. Nickel prices have lagged other industrial metal prices over the past 12-13 months. While zinc prices rose 80%, others rose in the range 20%-50%. Nickel prices meanwhile only registered a 15% increase.

Related article: Why have zinc prices been so strong in 2016?

RBC Capital Markets expect nickel prices to increase to about $10,000 per tonne over 2017, then $12,000 in 2018 and up to $20,000 per tonne in 2020 (note that I cannot say anything about their track record of forecasting nickel prices so caveat emptor).

One of the risks is that other nickel producers, from Australia, Canada and elsewhere, that mothballed their operations when prices were low now decide to bring back production. History suggests that they will, but the pace of bringing on supply could be sclerotic potentially making a spike in prices more likely.

The other risk is the US dollar. Nickel, as well other industrial metals of lead, copper and silver are among the commodities most sensitive to movements in the US currency. If the dollar appreciates, perhaps if the Fed tightens monetary policy sharper than the market expects and so increases real yields then nickel prices could hit a ceiling. Equally, if the dollar retreats from current levels then nickel is one of the commodities that stands to gain the most.

Related article: History points to nickel leading rebound in base metal prices

Related article: How innovation popped nickel price bubble

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Palladium’s catalyst

Since the start of the year palladium has been by far the best performing commodity, up almost 16% to almost $790 per oz. In contrast to the stellar performance from palladium, its precious metal kin platinum (+8%), silver (+7%) and gold (+5%) lag well behind. Palladium typically performs well at this time of year. Since 2000 the median increase in January versus the month earlier has been 3.4% with prices increasing over 80% of the time. But what has been behind the increase this year?

Much of the gain has just been due to a rebound in sentiment towards precious metals in general since the start of the year. A decline in yields on US Treasury bonds in the US has encouraged investors to move funds towards other perceived safe havens, gold in particular but also by extension silver and other precious metals. There were also signs, going into late 2016 that precious metals were also very much oversold compared, and that based on historical trends were likely to rise in the months ahead.

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Meanwhile, renewed scandal involving diesel vehicles, in which platinum is more commonly used as a catalytic converter, this time from Fiat Chrysler has dampened sentiment for platinum and optimism that increased petrol fueled vehicles will increase demand for palladium.

However, the main driver behind palladium price sentiment has been a tax break on Chinese car purchases. Buyers typically pay a vehicle-purchase tax, which is applied to vehicle prices before the 17% value-added tax. The tax was cut from 10% to 5% on purchases of small vehicles from October 2015. The tax break helped stimulate sales in China during 2016 by 14% during the first 11 months of 2016, according to the China Association of Automobile Manufacturers.

The tax break was due to expire at the end of 2016. But in mid-December authorities announced that it would be extended into the end of 2017. While Chinese consumers are likely to have sought to taken particular advantage of the tax break in December, because of the expectation that the tax break would expire, demand for new cars and by extension palladium catalysts could still be high in 2017.

Roughly 75% of palladium demand is from the autocatalyst sector. Palladium finds application in gasoline engines and is more exposed to the Chinese and US markets where diesel hardly features in the passenger vehicle segment. Chinese demand is particularly important in that almost one-third of net palladium demand (accounting for recycling) comes from the Asian economy.

Indeed, the Chinese government has form in doing last minute tax break extensions. The government previously cut the vehicle-purchase tax to 5% between 20 January 2009 and 31 December 2009. It later extended the tax-relief period to the end of 2010, but raised the rate to 7.5%. The 2009 tax cut stimulated year-over-year auto sales growth to 45.5% in 2009 and to 32.5% in 2010 from 6.6% in 2008, according to the China Association of Automobile Manufacturers.

Where do we go from here?

Palladium price strength comes on the back of declining output from top producer South Africa, which together with Russia is responsible for more than 80% of global supply of the metals. Data released this week showed South African output fell 2.1% in the period Jan-Nov 2016 versus the same period in 2015. Under investment in one of the main palladium producers could start to become more evident in 2017 and beyond.

Investment demand in the form of funds moving into ETF’s could help prices move higher. Set against this is that palladium is an industrial metal – higher prices, when compared with its close substitute platinum tend to result in users (vehicle manufacturers in general) looking to reduce its use or substitute it with platinum.

Strength in palladium prices has typically not been long lived as abundant above ground stocks can be brought into the market relatively quickly to take advantage of any price strength. Finally, higher prices are likely to incentivise the recycling of palladium catalytic converters (a source that typically accounts for around 30% of total supply).

Related article: Fools platinum?

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