Tue, 26 Jun 07 – Lead futures on the London Metal Exchange soared to an all-time high last Friday at $2,540 a tonne amid concerns that China, the world's largest lead producer, will reduce its exports of refined lead, thus tightening the world's supply.
The LME's three-month lead futures price has surged by nearly 50% from the beginning of this year, and has shot up five fold from its lowest point in 2003.
Lead stockpiles still remain at low levels. Last Friday, the stockpiles rose by 1,925 tonnes to 44,825 tonnes from Thursday, but were down nearly 3,400 tonnes compared to a month ago.
Exports of refined lead sunk 21.9% year-on-year to 42,991 tonnes in May, while exports plunged 49.1% year-on-year to 130,245 tonnes in the first five months of the year, according to statistics released by the General Customs Administration last Friday.
Net lead exports in May were 40,753 tonnes. For the January to May period, there were a total of 118,287 tonnes of lead exports, plummeting 52% from nearly 245,000 tonnes during the same period last year.
Controlling Policies and High Lead Concentrate Price Pulling Down Exports
An official surnamed Wang with the import and export department of Anyang Yubei Gold & Lead Co. Ltd., the country's second largest lead smelter, said the company has reduced export volume to only 20% of total lead production since last year, while previously the export volume was 50% of total lead production.
"Governmental controlling policies raised export lead prices higher than international prices, which significantly reduced domestic smelters' profitability. Currently, the only exports our company does are based on our long-term contracts with clients, and some of our clients can split the increase of export cost with us," Wang said.
The central government cancelled tolling business of importing concentrate and re-exporting refined lead at the end of 2005, removed 13% value-added tax rebates for refined lead exports from mid-September 2006 and has imposed a 10% lead export tax since June 1 of this year.
Since 90% of lead concentrate for the company is imported, the company will plan on producing 120,000 tonnes this year under high concentrate imported prices, although the company is capable of producing 160,000 tonnes refined lead per annum.
When the company uses imported lead concentrate, it loses RMB 1,500 ($196.85) to RMB 2,000 to ($262.47) a tonne when selling refined lead in international markets, he added.
Charging a treatment charge (TC) is major source of revenue that lead smelters earn from miners when they import lead concentrate, as based on the LME's three-month lead price.
"The current TC, at $60 to $70, means no profit margin for smelters, forcing many lead smelters to shut down or reduce production," he said.
China's lead output amounted to 1.09 million tonnes in the first five months of this year, up 6.7% from the same period last year. Lead concentrate output rose by 10.1% to 284,500 tonnes in the first five months, according to statistics released by the National Bureau of Statistics.
Cash price of refined lead closed at RMB 18,100 ($ 2,375.33) a tonne yesterday in Shanghai's Huatong Platinum and Silver Nonferrous Metals Exchange.
Compared with sluggish exports, China's domestic lead demand is going up, which might be a major reason why lead smelters are retreating from the international market, Wu Tianxiao, an analyst with Shanghai Metalease, said.
"Nearly 80% of lead [in China] is used in the lead acid storage battery manufacturing industry. Supply in the domestic market is slightly tight now, as growth in lead production cannot catch up to the country's growth in demand," Wu said.
She added that 50% of the lead concentrate supply relies on imports, though the low-level TC is discouraging smelters from importing lead concentrate.
"Cash flow has been squeezed by higher concentrate prices. We have to pay $1,800 to $2,000 for one tonne concentrate import, nearly five times higher than in 2003. Although we have secured long-term supply contracts, the concentrate price we are offered rises drastically along with the LME lead future price," Wang from Yubei Gold & Lead said.
The company started production of secondary lead alloy since the beginning of this year to offset the high cost of lead smelting using ore concentrate, Wang said. It is now able to produce 100,000 tonnes of secondary lead alloy per annum.
Wu from Metalease anticipated that the LME's lead price will further rise in the coming months, as China's lead exports will continue to dip dramatically due to lower international prices and growing domestic market demand.
Wang from Yubei Gold & Lead believed the domestic lead cash price will soar to RMB 30,000 ($3,937) a tonne within the next two years.
"Booming downstream automobiles and electric bicycle production could mean a major boost in lead prices over the next two years. However, the cost of lead acid storage batteries is still a small part of the automobile and electric bicycle production cost, so higher lead prices might not slow down consumption from automobiles and electric bicycles," Wang said.
China's Lead Supply and Consumption Forecasts
As the world's largest lead producer, China contributed 34% of global output last year.
China will produce 3.15 million tonnes of refined lead this year, up 15% from 2.74 million tonnes last year. Lead concentrate output will grow 18% to 1.59 million tonnes in 2007, the China Nonferrous Metals Industry Association predicted.
Feng Juncong, a lead and zinc expert with Beijing Antaike Information Co. Ltd., a CNMIA-affiliated consultancy, predicted that the stable development of the lead acid storage battery industry would push up China's domestic lead consumption by 10.2% annually from 2007 to 2010, hitting 3.32 million tonnes in 2010.
From 1999 to 2006, China's refined lead actual consumption grew by an average of 14.3% per annum. The actual consumption of refined lead was 2.2 million tonnes in 2006, and is expected to hit 2.48 million tonnes in 2007, according to Feng.
She further forecasted that net exports of refined lead would be 500,000 tonnes in 2007, remaining unchanged from 2006.
The government is attempting to control redundant investment in the lead and zinc sector in order to maintain a balance of supply and demand.
By 2010, domestic refined lead capacity is set to be reduced to 4 million tonnes, and zinc capacity to approximately 5 million tonnes, as a result of eliminating outdated capacity. Zinc and lead recycling will be encouraged, with an aim to increase the consumption of recycled resources to 30% of total annual consumption
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