Backwardation portends change Lead prices are riding a crest

It’s been a rough ride for lead producers for the past few years but, while fundamental problems still abound, some peculiarities in the world’s lead markets have developed recently that indicate a change in store which bodes well for short- term price performance.

Take a look at London Metal Exchange lead prices. The average during 1986’s third quarter was 17.8 cents per pound, but prices have been strengthening lately. Oct 13’s price was 20.4 cents .

Now 20.4 cents per pound may not sound great, but over the past few years its been about as good as lead producers have been likely to get. Average prices in 1983, 1984 and 1985 were, respectively, 19.8 cents , 20.1 cents and 17.8 cents .

And while a 2.6 cents per pound improvement in the price of a commodity doesn’t seem earth- shattering, its a 14.6% rise — the best performance among the seven metals traded on the LME, bar none.

Gold prices, which have been getting a lot of attention, for the same period increased just 12% on the LME while silver was up 5.6%. Zinc increased 8.2% and aluminum 1.1% while copper fell by 1.2% and nickel fell by 3.2%

Since Oct 10 lead prices on the LME have also been in backwardation — the spot price has been higher than the futures price — and that’s a fairly unusual situation. The LME quotes spot prices and a future contract for delivery three months hence. The norm is for futures prices to carry some premium over the current price, a situation referred to as a contango, for the time value of assuring a price in the future.

Backwardations are not that uncommon and interpreting them can be tricky. They might indicate some fundamental shifting in the market place, in effect, the market saying that it believes the price for lead will be lower in three months than it is today.

A spokesman for a major lead producer, however, said backwardations are often meaningless in terms of market fundamentals: “Sometimes it’s just a squeeze on the market — someone’s bought forward and now has to cover his position.”

Regardless of the market, there is a squeeze on North American lead supplies. Voluntary production cutbacks in Canada and the U.S. and labor disputes earlier this summer at Australia’s Broken Hill zinc- lead producing area are the primary reasons.

LME inventories are down to about 30,000 tonnes compared to 61,000 tonnes at the end of 1985 while U.S. producer stocks at the end of August were down to about half of what they were a year previous.

With inventories down, production slowed and demand increasing, lead prices could strengthen right into early 1987. George German, vice-president of zinc and lead metals for Noranda Sales, says with the market entering the peak period for demand, “lead prices are riding a crest and I’m not sure it’s going to slow much.”

Metals Analysis and Outlook, a publication of Metals and Minerals Research Services of London, estimates that these reasons, among others, have resulted in non- socialist world mine output declining by 10% in 1986’s first half compared to 1985.

“This is now feeding through into falling primary refined lead output, just when the market is passing through the best period for the battery sector.”

In fact, it’s lead’s notorious seasonality that best explains the LME price backwardation. Late fall is traditionally the peak for lead demand as automotive battery sales pick up in preparation for the winter driving season.

“Activity in the battery sector in the U.S., where (lead) stocks are at their lowest level since 1982 and auto sales continue to be up on 1985 levels, is holding up well … providing much needed stimulus to the overall market which is now taking its tone from developments in North America.”

Lead may not have the same lustre as gold or silver, but it has been performing much better than expected recently. With a heavy production demand for batteries, lead’s strong showing could continue into 1987.