Lead and zinc (and copper) are our pick of the base metals going into 2010. They currently have increasingly attractive mid-term fundamentals, which may well tempt some greater speculative investment interest in the coming months. In lead's case, the continuing remarkable growth in Chinese car sales is helping offset the slowdown in sales from the rest of the world, and this trend is likely to be repeated in 2010.
The expiration of the various car scrappage schemes may keep non-Chinese new car sales at very low levels, as potential buyers have probably bought during the incentive period and will not return next year. But replacement battery demand, as ever, will support prices.
The great variable is the situation in China regarding lead smelter closures. We understand that the 300,000t/y of capacity that has been closed for the past several weeks may be allowed to restart in November, but this does not spell the end to China's lead supply problems. We expect to see further closures, as Chinese investigators across all lead-producing provinces pull the plug on more capacity that does not meet stricter environmental safety standards.
This will probably start with about 600,000t/y of old production capacity that was earmarked to close well before the lead poisoning events came to light in August. As a result, in the short-term there could well be a squeeze on supply until new production capacity - we estimate as much as 540,000t/y over the next 28 month's comes online. Zinc stands to benefit perhaps more than any other metal from any sustained economic recovery, due to its close association to both the automobile and construction sectors.
LME stocks have been sliding and cancelled warrants have been rising since late September, implying that a level of restocking, at least, is taking place. This is corroborated by rising physical premiums and prices for galvanized steel products, which accounts for about 50% of zinc off take. However, the flip-side on the short-term is that producers, who shut down capacity rapidly in 2008 and early this year, have brought idled capacity online a little too enthusiastically, and we expect the market to finish in surplus by 450,000t in 2009, narrowing to 160,000t in 2010.
In the short-term lead has the better fundamentals, especially with replacement battery demand set to soar as the northern hemisphere winter approaches. Zinc will track copper and lead gains but its price will be subject to corrections as the market absorbs the large surplus. Short-term LME three-month price: lead: $1,850/t-$2,400/t, zinc: $1,825/t-$2,250/t.
Courtesy: Fortis Metals Monthly
