LEAD ANALYSIS

Secondary lead oversupply to weaken price

WoodMackenzie lead analyst Farid Ahmed looks at the near-term fortunes of the lead price

If the remainder of this winter is unexceptional, then the industry will just about get by. But a spike in demand could quickly precipitate severe tightness and surging prices as limited lead stocks rapidly dwindle.

Last year was a wild ride. We’re now a few weeks into the New Year — a good time to cast our gaze forwards and consider what 2021 might hold in store. Sure, 2020 was ravaged by the coronavirus, but also made a strong recovery. Will that scenario just roll on into this year, or might we see more turbulence ahead?

As governments endeavour to limit the human and financial damage from the pandemic, we’re optimistic the rollout of vaccination programmes will bring the worst effects under control — albeit with some flare-ups and disruption along the way.

At Wood Mackenzie, we forecast a 4.6% rebound in lead consumption this year after the -3.9% dip in 2020. Mine production will be insufficient to stave off contraction in primary (virgin) lead production. But this will be more than offset by secondary (recycled) output booming due to reduced supply chain disruption and better availability of scrap lead batteries.

This will create a refined lead oversupply and downward pressure on the lead price — which we forecast to be slightly up on last year but still well short of the annual averages of the recent past.

The incoming US president has announced a stimulus plan that hopes to lead on battery technology and clean energy. The Democrats’ control of Congress bodes well for success in accelerating this green energy transition. Core to these aspirations are EVs and renewable energy.

Similarly, the 14th Chinese Five-Year Plan will soon present more detail on their strategy for EV targets and the expansion of renewable power generation.

Governments around the world are setting ambitious targets for removing internal combustion engine vehicles and achieving zero-emissions economies.

Batteries will be central to this transition. While lithium-ion is the favoured battery technology to power EVs, almost all EVs still also use auxiliary lead batteries, although with less lead per battery compared with a regular ICE equivalent. As such, the speed at which government policies translate into momentum for increased sales of EVs and battery demand for energy storage systems will be a key factor in 2021.

There is still downside risk.

The massive cost of supporting economies during the pandemic will have reduced governments’ abilities to finance the critical infrastructure needed to make EVs commonplace, or for major wind and solar power installations.

Further risk exists from the personal economic hardships endured through the pandemic, overlaid with the relatively high cost of EVs. This may limit consumer purchases of EVs but could also push them towards ICE cars with more lead in their batteries.

Equally, the higher relative initial capital cost of Li-ion batteries in increasingly price-sensitive markets could see lead gaining an increased share of new ESS deployments, setting the tone for future expansion. That needs the lead battery industry to really get its act together — or someone else will eat our lunch!

Much will depend on the appetite and success of the new US administration and Chinese Five-Year Plan to transition ambitions into reality. In turn, much of that will depend on the depth and duration of this new wave of lockdowns.

Battery makers have struggled to build inventory ahead of the seasonal winter demand peak. Since Q2 2020, they’ve played catch-up to the urgent need for replacement batteries, as owners tried to restart their cars postlockdown.

The high level of premature battery replacements last year meant a higher proportion of vehicles with fresh batteries going into this winter. This suggests fewer battery failures during the cold season than would normally be expected, easing pressure on battery manufacturers.

But this isn’t happening yet. Lead smelters report full order books with battery makers until at least late Q1 2021. Automotive battery demand is delicately balanced, with the outcome much dependent on the weather in the latter part of winter. If the severe conditions forecast for Europe and North America materialize, it could have equally severe impacts on the lead industry.

Another surge would stretch supply. Not only are inventories running low, but the industry would be unwilling to rebuild stocks late in the season at a point when it normally transitions to quieter times in spring and summer.

To make matters worse, refined lead availability has also been an issue as the scrap supply chain became locked up in lockdown. Ongoing Covid restrictions across Europe and North America will again restrict the collection of scrap to resupply smelters desperate for feed.

If the remainder of this winter is unexceptional, then the industry will just about get by.

But a spike in demand could quickly precipitate severe tightness and surging prices as limited lead stocks rapidly dwindle.