London 10/10/2016 - The surge in available LME lead over the past week is an indication of tough physical market conditions for the metal, which should maintain the pressure on premiums if prices remain high, sources told Metal Bulletin.
Lead availability on the LME has risen 21% since the start of October and is now at its highest since August last year after a major 19,200-tonne rewarranting in Rotterdam and Vlissingen on Tuesday, October 4.
A further 5,575-tonne rewarranting followed in Spain today, according to LME warehouse data, which is two days in arrears.
Three-month lead prices have also risen above $2,100 per tonne - their highest in more than a year - amid tight spreads but physical premiums remain low and the recent warranting and rewarranting of lead in Europe indicates that the market is hugely oversupplied.
"I'm not surprised [by the warranting] - there is no physical demand and clear oversupply. This is a bumped-up price on the LME," a lead trader said.
And with LME price rises outrunning the metal's weak physical fundamentals, further LME warrantings and rewarrantings are likely in light of slow sales.
"At these prices I expect you'll see a lot more rewarranting, and the hidden stocks will start flooding back on. There is absolutely no demand coming on the spot side and not a lot physically in general," a producer source said.
But lead prices, which increased 12% during September and are up 19% in the year to date, are still rising while metal market investors look for value plays.
Net long speculative positioning in the LME lead contract has risen for five consecutive weeks as of the week to September 30. Lead net longs increased 69% during September or 24,145 lots during that period.
"Speculative positioning in LME lead continues to improve. Still, lead belongs to a group (lead, tin, aluminium) in which the NLFP is relatively low in the year to date compared with another group (copper, zinc, nickel). So speculative buying could come at a stronger pace in the coming weeks should money managers be inclined to play the 'catch-up' trade," FastMarkets analyst Boris Mikanikrezai said.
PREMIUMS LOW
But despite the higher prices, physical premiums for lead remain mired at a low $15-20 per tonne in Antwerp, Vlissingen and Spain - where most of the LME stocks are held - due to weak physical demand.
"The situation is really bad - there are no buyers even at $20 per tonne for 99.97 [purity lead]," a second trader said.
Physical trade of lead into India - one of lead's most liquid physical spot markets - has also thinned out partly due to higher prices.
"It's absolutely a subdued market and we don't see any signs of revival largely because of higher LME prices. [Indian consumers] don't want to buy because there is a lot of cheap domestic material available," the second trader said.
And premiums should continue to stay low in line with higher availability, sources noted.
"Premiums will be coming under some pressure if this continues for much longer," the producer source said.
Negotiations for next year's annual supply will start in a bout a month in the European, US and most of the Asian lead markets. But any attempts at raising premiums on the sellers' side could well prove difficult if prices stay at current highs.
"It's more speculation than fundamentals. If the lead price remains here... I'm not expecting an increase in the annual premium," a third trader in Europe said.
(Editing by Mark Shaw)