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The global lead market has bifurcated since the start of June with Shanghai Futures Exchange (ShFE) prices significantly outperforming the London Metal Exchange (LME).
LME three-month lead touched a two-year high of $2,359 per metric ton in May but has since retraced to $2,190 and is now up by just 4.3% on the start of the year.
The equivalent Shanghai price has marched higher to six-year highs and is up by 12.4% on the start of January.
The divergence is more pronounced on a cash basis with the LME forward curve in contango and the Shanghai curve in backwardation.
The contrasting fortunes of the two markets for the battery metal derive from the distribution of inventory. The LME warehouse network is awash with metal, while Shanghai is gripped in a rolling squeeze.
LME lead stocks more than doubled over the first quarter of 2024, hitting an 11-year high of 275,925 tons on April 2.
The headline figure has since slipped to 208,525 tons but there’s ongoing churn as stocks financiers seek out cheaper storage options, which is itself a sure sign of an over-supplied market.
The bulk of this year’s inflow has been Indian metal, which accounted for 46% of warranted stocks at the end of June, up from 24% at the start of the year.
It’s worth noting that there were another 140,700 tons of off-warrant inventory at the end of May, most of it located at Singapore, the current hub of LME lead stocks activity.
LME warehouses in Singapore have seen 63,000 tons of fresh warranting activity over June and July, suggesting a large part of that off-warrant tonnage is still there.
ShFE stocks, by contrast, total a relatively modest 59,408 tons, representing a marginal year-to-date increase of 6,524 tons.
Market open interest on the ShFE lead contract has been running at elevated levels, registering a life-of-contract high of 215,224 contracts in the middle of June.
It currently stands at 184,625 contracts, up from 69,000 as recently as March.
The lift in trading activity has coincided with a sharp tightening of the Shanghai time-spread structure with backwardations running all the way through to June next year.
Short-position holders are evidently struggling to find sufficient units to deliver to exchange warehouses, although more metal is expected to arrive on the July contract expiry.
Exchange tightness reflects a shortage of material from both primary and secondary smelters in the domestic market. Spot physical transactions are taking place at a premium even to the elevated ShFE cash price, according to local data provider Shanghai Metal Market (SMM).
China’s primary lead production fell by 4.7% and its secondary output by 8.5% over the first half of the year, according to SMM, reflecting shortages of both mined concentrates and battery scrap.
Imports of concentrates slid by 13% to 418,500 tons in the January-May period with primary smelters topping up with battery scrap at the expense of pure secondary refiners.
The imbalance between a well-supplied Western market and a tight Chinese market is the polar opposite of the situation just a couple of years ago.
The destructive impact of Covid-19 on supply chains caused LME stocks to shrink to below 50,000 tons in 2021 with physical premiums soaring as buyers struggled to source available metal. ShFE stocks, by contrast, rose above 200,000 tons in September of that year.
The east-west imbalance opened an export arbitrage window through which Chinese smelters shipped much-needed supply to western markets.
China flipped from being a net importer of refined lead in the 2017-2020 period to a significant net exporter over the following years.
Net outbound flows totalled 93,000 tons in 2021 and grew to 115,000 tons in 2022 and to 185,000 tons last year.
Exports have slowed appreciably this year with the January-May total falling by 76% year-on-year to just 14,500 tons.
The current out-performance of Shanghai relative to London has now opened a profitable import arbitrage with signs that trade flows are about to reverse.
This week has brought a spate of LME stocks cancellations with 29,425 tons being prepared for physical load-out.
The benchmark cash-to-three-months spread has contracted sharply to a contango of $22 per ton from over $60 last month.
It’s possible of course that this is just metal on a run-around to cheaper LME storage but it’s clearly caught the London market off-guard.
It’s quite possible that this particular tranche of lead may not reappear in a different LME shed in the near future but may be embarked on a one-way journey to China.
(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)
(Editing by David Evans)
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