We’re all on the lookout for buried treasure – the priceless antique sitting unnoticed in your attic, or maybe a stack of cash stashed away in your wall.
Few of us ever find it, but perhaps that’s because we’re looking in the wrong place…
Consider the metals market, for instance. From gold to palladium and aluminum to zinc, metals have been basically flat – experiencing the occasional downward trend.
No, we’re not seeing many trading opportunities coming from the mining sector.
There is one metal, however, that’s actually on the up-and-up. And you probably have a valuable store of it sitting right in your driveway.
I’m talking about lead…
Sharpen Your #2 Pencils
Indeed, the lead futures markets have awakened, creating some great investment opportunities while the rest of the metals sector is stagnant.
Notably low and falling, inventory levels on the London Metal Exchange (LME) are the cause of the price spike.
You see, LME “free stocks,” or live warrants, dropped dramatically just over the past month. On March 19, they were at the lofty level of 224 kilotonnes (kt). But now the total is under 94 kt, while Shanghai deliverable stocks stand close to a mere 50 kt!
Now, some may argue that we’re not yet at record lows. They’re thinking of the period between 2004 and 2007 when LME warehouses were almost totally void of lead on several occasions. But that was also when China’s gross domestic product was growing at a double-digit pace. The Chinese were consuming every commodity they could get their hands on.
But, boy, have things changed…
According to recent estimates from Wells Fargo CTA Commitment of Traders, the market is net short 15%, with a capacity of 30,000 lots (or 750,000 metric tonnes). These shorts will eventually have to cover their positions.
This is a sensitive time for lead now, too, as the industry is worried about future supplies…
The Heavy Metal Environment
Mining and smelting lead ore is a dirty business. And, in the United States, environmental issues weigh heavily on the industry.
Privately held Doe Run, the leading U.S. lead producer, was forced to close its primary lead smelting facility in Herculaneum, Missouri, which had been in operation since 1892, at the end of 2013. The company felt it would cost too much – approximately $100 million – to install the pollution control technologies mandated by the Clean Air Act that reduce sulfur dioxide and lead emissions.
What’s notable about that occurrence is that the Doe Run smelter was the last primary lead smelter in the United States. Since 2013, there’s been no U.S. facility to process lead ore.
Currently, all lead produced in the United States comes from secondary smelters using recycled materials. The majority of the lead used by ammunition manufacturers, for example, comes from recycled car batteries.
Only about a dozen secondary smelters remain in operation to process and recycle lead. But the U.S. Environmental Protection Agency could potentially take them out, too.
So what does this all mean? Well, it’s good news for the environment. But it’s not the best for lead supplies, meaning prices could go up, up, up.
Put the Pedal to the Metal
Lead’s high recycling rate means that it’s likely to play a growing role in solving the world’s future energy challenges. Doe Run anticipates increased demand for lead-based batteries to power vehicles, provide renewable energy storage, and telecommunications.
In fact, approximately 90% of the lead Doe Run produces ends up in lead-acid batteries, one of the most recycled products in America. Lead-acid batteries also dominate the smaller, fully electric vehicles and micro-hybrids market.
Lux Research reports that micro-hybrids will grow nearly eight-fold to 39 million vehicles by 2017, creating a $6.9-billion market for energy storage devices, like lead-acid batteries.
On top of that, governments and utility companies are continuing to invest in and grow solar and wind power. The key to making this kind of weather-reliant energy production viable is storage, such as in rechargeable lead-acid batteries.
As smaller portion of lead’s demand comes from its use in weatherproofing roofs, soundproofing rooms and buildings, shielding from X-ray radiation, and transporting and storing nuclear power. The last of which is also on the rise in Asia.
The questions now is whether the amount of recyclable lead is sufficient to meet rising demands.
Don’t Be a Lead Foot
While China is by far the largest global producer and consumer of lead, its growth rate is at 25-year lows, and the country is now in full-fledged stimulus mode.
Over this past weekend, the People’s Bank of China cut the reserve requirement ratio (RRR) by a full percentage point to 18.5% starting on April 20. While the RRR cut gives banks more low-cost cash at their disposal, the real financing cost remains high, given the decline in producer prices.
As such, China will continue to be prudent with its monetary policy. Surely the impact of an RRR cut should boost confidence in the markets, but this goes squarely against encouraging any short-selling here.
Instead, this is clearly the accommodative practice of buying extra time and kicking the can further down the road.
In the end, long futures holders need to be patient, as the lead market may face some headwinds before it makes its grand leap forward. Technically, there is resistance and an upside target of $2,120 per metric tonne.
The message here is to be tactical.
Don’t be a lead foot by driving fast and forward into a long position. Scale into the market on dips, keep an eye on LME and Shanghai inventory levels, and check out the options markets when volatility spikes or dips provide opportunity.