A rising tide lifts all boats but some are heavier than others.
Industrial metals are glowing white hot in a fusion of post-pandemic manufacturing recovery and an emerging narrative of a commodities supercycle.
Copper has hit all-time highs above US$10,000 (RM41,000) per tonne, with London Metal Exchange (LME) three-month metal last trading at US$10,350 (RM42,700).
Tin hit a 10-year high on Thursday and aluminium is charging up towards its 2018 peak of US$2,718 (RM11,166), last trading at US$2,530 (RM10,394) per tonne.
But not every metal is on a supercycle surge.
Lead and zinc have been lifted by the broader metallic rally but seem reluctant participants.
While the copper price has more than doubled from its Covid-19 low point in March 2020, zinc has appreciated by a more modest 58% and lead by just 30%.
The reason, as the International Lead and Zinc Study Group (ILZSG) has noted, is that both markets recorded big supply surpluses last year and are on course to do the same again this year.
Moreover, neither fits well into the supercycle narrative, leaving the two metals the ugly sisters at the supercycle ball, just as they were during the last price party in 2009-2010.
The refined zinc market recorded a supply-demand surplus of 486,000 tonnes last year and is forecast to record another hefty surplus of 353,000 tones in 2021, ILZSG’s latest twice-yearly assessment found.
Lead production, meanwhile, exceeded usage by 172,000 tonnes last year and will do so again this year to the tune of 96,000 tonnes, ILZSG said.
It will be the third consecutive year of oversupply.
Zinc mine production was hit hard by lockdowns in supplier countries last year, falling by 4.9% relative to 2019. But the world’s smelters managed to lift metal production by 1.6%, even as usage slumped.
Lead production – both mined and refined – fell last year but demand fell harder, unsurprisingly given the metal’s exposure to the automotive sector.
Critically, China has not come to the rescue by hoovering up the rest of the world’s surplus metal as it has in other markets, including copper and aluminium,
China’s net refined zinc imports fell by 6% to 512,000 tonnes last year. It was the second consecutive year of decline.
Net imports of refined lead have collapsed over the last two years from 102,000 tonnes in 2018 to just 17,000 tonnes in 2020.
Last year’s surplus metal, it follows, is still in storage, albeit not fully statistically visible.
LME zinc inventory rose by 150,000 tonnes last year but there was a shadow build of 100,000 tonnes in off-warrant stocks – metal warehoused with explicit contractual reference to potential LME delivery.
The LME zinc market gets the occasional sharp reminder of surplus in the form of concentrated deliveries on to LME warrant, such as the 105,800 tonnes that hit the system over two days in January and the similar 31,700-tonne burst last month.
Physical surplus is weighing down both metals, neither of which has an obvious tie-in to the electrification and decarbonisation drivers that have set other metals abuzz.
Indeed, in the case of lead, the metal would seem to be an obvious loser in the transition from internal combustion engines to electric vehicles, even if its usage in stationary battery storage is a forgotten part of the green story.
Zinc batteries are an expanding part of the battery landscape but still represent a small component of a usage profile that remains dominated by galvanising steel.
Both metals will continue to benefit from a global manufacturing recovery but neither is likely to generate the same investment excitement rolling over other battery metals such as lithium and cobalt.
Lead and zinc look set to be the supercycle stragglers, just as they were last time.
The China-led supercycle of the 2000s saw copper peak at its previous all-time high of US$10,190 (RM41,850) per tonne in February 2011.
Zinc’s all-time high came in 2006 and lead’s one year later in 2007. Both rose with the 2009-2010 price tide but without getting close to their previous summits.
Zinc’s supply-usage cycle is out of sync with most of the other metals currently enjoying an “old-economy” resurgence.
That means that lead’s cycle is equally out of kilter since just about all the world’s primary lead comes from zinc deposits.
Zinc is the dominant sister both geologically and in the trading arena.
In the ever-popular relative-value trade between the two metals, lead tends to be the bear component. Zinc’s premium to lead is around US$750 (RM3,080) per tonne.
That wide gap seems at odds with the ILZSG’s forecasts since relative to global usage – 13.2 million tonnes in the case of zinc last year and 11.5 million for lead – the zinc market would appear to be carrying the heavier weight of surplus metal.
Lead’s large discount is also surprising since, in contrast to zinc, the market shows signs of physical tightness.
US premiums are at nine-year highs, according to Fastmarkets, as the shuttering of a secondary smelter in South Carolina leaves buyers exposed to rolling disruption in the freight sector.
The discrepancy is down to investors’ focus on the zinc raw materials story at the expense of what’s happening in the refined segment of either market.
The zinc concentrates market is much tighter than anyone expected it to be after zinc’s bull surge over 2017-2018.
The anticipated wave of mine supply has failed to materialise and following Covid-19 lockdowns, is still running late.
The high zinc premium is predicated on this raw materials constraint, which affects lead less because it needs less mined material to balance what is largely a secondary supply chain.
The focus on zinc mine supply, however, leaves the relative-value trade open to unforeseen developments in the refined metal segment of the markets, such as the mass arrival of zinc stocks in LME warehouses or signs of stress in lead’s physical supply chain.
Zinc and lead look set to continue fighting it out in this long-running reverse beauty contest. The price gap between the two will tell you which is winning.
The main bull party is taking place somewhere else. — Reuters
Andy Home is a columnist with Reuters. The views expressed here are those of the author.