London 12/10/2015 - Steep cuts to mine supply and smelter expansions represent a significant shift in the global supply-and-demand balance for lead, Doe Run's Jose Hansen said.
This will pressure treatment charges (TCs) lower and stabilise prices, Hansen, the lead producer's vice president of sales and marketing, told FastMarkets in an LME Week interview.
"With the recent announcements and what other regions will mean in terms of lead demand, prices should be better than those we have seen last week," he said.
LME three-month lead hit $1,612 per tonne on Tuesday last week, its lowest in more than six years. But prices have since rebounded to above $1,800 after Glencore said it would cut 100,000 tonnes of mined lead production, along with just less than four percent of world zinc supply.
This adds to the 72,000 tonnes and 24,000 tonnes of mined lead production lost from the Lisheen and Century mines respectively - these operations are due to close in the fourth quarter of this year. Combined with Glencore's cuts, 3.5 percent of 5.46 million tonnes of mined production will be lost.
As well, Korea Zinc has large-scale smelter expansion plans scheduled for lead and Nyrstar's Port Pirie smelter will restart late next year.
"All these factors plus the recent [Glencore] announcement are going to change the game - it will change the market for lead concentrates and also the market for metal," Hansen said.
LEAD TCs LOWER IN 2016 ON TIGHTER SUPPLY, IMPROVED DEMAND
And this shift towards a tighter supply market will pressure TCs, the discounts paid to smelters for the costs of turning concentrate into metal, lower next year after increases from $155 to $177.5 so far this year.
"At some point the market is going to change… smelters like Korea Zinc are boosting production and these announcements [for cuts mean ] there is going to be a pressure on the lead concs market," Hansen said, adding that the $222 TC benchmark for the 2015 low silver lead concentrate was "a high TC for us".
Although primary smelters in China, the world's biggest consumer of lead, were pressured into shutdowns and production cuts by increased environmental regulation and a domestic credit crunch this year, green shoots are appearing on the demand side.
"Smelters are now looking for importing more material especially in China due to the arbitrage between Shanghai and the LME - in which case it meant that demand has increased," Hansen said, pointing to recent measures by the Chinese government to boost car buying through tax cuts.
Concurrently, Doe Run sees demand increasing three percent next year.
New developments towards hybrid and electric vehicles are also a welcome boost for the lead industry, providing a sub-market for lead-acid batteries, the main usage of lead metal.
"There is still a good advantage in using lead acid batteries - it gives you the power you need, it's recyclable and in terms of sustainability it's an ideal product," Hansen noted. "Some people want to use full electric vehicles which use lithium-ion batteries but still those cars also use lead acid batteries."
US LEAD DEMAND TO DECLINE, DOE RUN WILL LOWER OUTPUT AS PLANNED
US lead imports were rising due to slowing domestic production, Doe Run noted earlier this year, but this trend is likely to end because jittery consumers overbought.
"This year we will see a good level of imports but this level will decrease in the coming years because people have imported more lead than needed," Hansen said.
Still, Doe Run will lower the amount of lead concentrate produced next year due to a move into new ore bodies that contain lower metal grades initially.
"In terms of production we want to keep our plants working as normal. Next year we are going to be off a little bit on production and this is something that we are recovering probably in 2017," Hansen said.
Of all the base metals, producers of lead are perhaps the most sensitive to price reductions due to the industry's reliance on scrap as a raw material but these should remain afloat, with falling emerging market currencies sheltering secondary smelters.
"Depreciation of emerging market currencies could help them to keep operating because their costs in terms of dollars is going to be much lower," Hansen said. "It is a possibility we will see secondary smelters shut down but given the current conditions I don't think that's going to happen."
(Editing by Mark Shaw)