Commodities Comment:Lead the laggard has ground to cover to catch zinc
Feature article
Lead prices of late have spent the most sustained period at a discount to zincsince 1H 2010. We examine the origins of the move to a majority leadpremium back in 2007, and comparing today’s conditions we conclude thatlead has a lot of ground to cover to retake the lead from its sister metal.ILZSG data released on Wednesday indicates a softer lead market with asurplus of 11kt Jan-Jul 2014, compared to a 258kt deficit over the sameperiod for zinc. However, the difference in market balances is not seen as sostarkly different by Macquarie, particularly as we note that zinc stocking inChina’s bonded warehouses is likely to have distorted ILZSG’s Chinaapparent demand figure.
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South African platinum refined output in 1H 2014 was 1.24 Moz, down34% YoY, palladium 0.79 Moz, down 24% YoY, and rhodium 0.20 Moz,down 26% YoY, latest data released on Thursday shows, showing theimpact of the 5-month long strike. The miners’ sales of those metals wereless affected; 1.65 Moz of platinum sold, down 16% YoY, 1.0 Moz ofpalladium, down 5% YoY, and 0.23 Moz of rhodium, down 14% YoY. Thatsales were less affected than production was due to the sale of (wecalculate) 405k or refined platinum stock, 223k of refined palladium and36k of refined rhodium. An even bigger liquidation of stock was seen intwo minor PGMs, ruthenium and iridium. Ruthenium refined productionwas 0.26 Moz, 36% lower YoY but sales were 0.53 Moz, down 25% YoY,while iridium refined production was 65k oz, down 21% YoY but sales198k oz, up 124% YoY. Collectively the likelihood that miners will stopliquidating stocks (and indeed will replenish them to some extent) in 2H isa key reason why we believe sales of PGM will be similar to that seen in1H, despite the ending of the strike.
China’s NDRC published official regulation on coal quality controls onMonday, effective from 1 Jan 2015. On Wednesday, the issue receivedsignification media attention and, as a consequence, investor interest. Formore details on the regulation, please see the front page of ourCommodities Comment published on Monday. In terms of the impact onAustralian and South African coal exports to China (Indonesia is muchless impacted), the key clause in the release is one relating to a"restriction" of coal sales and consumption in three major consumptionregions (including the cities of Guangdong, Shanghai and Beijing), if a 1%sulphur, 16% ash limit is breached. There is a lot of uncertainty as to whatthis clause means in practise. First, is a "restriction" equivalent to a banSecond, the "restriction" is also with reference to "bulk" coal or "scattered"coal, depending on the translation. Some market participants haveinterpreted this to mean that it affects power plants, while others think theyare exempted. Until more clarity is provided on this issue, it is tough toprovide an estimate of impacted volume. We do not expect any met coalmarket impact, since the coals are washed.
Lead the laggard has ground to cover to catch zinc
Lead prices of late have spent the most sustained period at a discount to zinc since 1H 2010. Weexamine the origins of the move to a majority lead premium back in 2007, and comparing today’sconditions we conclude that lead has a lot of ground to cover to retake the lead from its sistermetal. ILZSG data released on Wednesday indicates a softer lead market with a surplus of 11ktJan-Jul 2014, compared to a 258kt deficit over the same period for zinc. However, the differencein market balances is not seen so starkly different by Macquarie, as we note that zinc stocking inChina’s bonded warehouses is likely to have distorted ILZSG’s China apparent demand figure.
When examining zinc’s buoyancy this year, many will have also noted the inability of its sistermetal lead to keep up. Zinc price strength, as well as generally improved investor regard forcommodities since mid-year, has certainly lent some support to lead prices, but along with copper,the dull metal has underperformed the complex in 2014.