||2,391.50 Mar 23 high
||2,458.50 Feb 2017 high
||2,576.50 Nov 2016 high
||2,281 20 DMA
||2,214 lower UTL
||2,190 Mar 14 low
DMA – daily moving average
DTL – downtrend line
Fibo – Fibonacci retracement level
H&S – head-and-shoulder(s) pattern
(H)S/RL – (horizontal) support/resistance line
MACD – moving average convergence divergence
RL – resistance line
UTL – uptrend line
- Lead’s pullback has consolidated; prices started to edge higher last week and leapt higher on Wednesday March 22, jumping 4.5%. The rally extended on Thursday in a move to $2,391.50 per tonne but prices have since started to correct/consolidate.
- We said on Tuesday March 21 that resistance up to $2,325 per tonne will need to be overcome before the path opens up for a challenge of the February and November peaks – last week’s rally has now opened the gate to that path, but prices are hesitating to continue along it.
- The stochastics have turned negative, so prices look in need of further consolidation.
- Before the mid-February upside break, which failed, we had been saying that we expected prices to hold in the $2,200-2,400 range. That range is holding for now.
- We expect the overall upward trend to continue, although overhead supply above $2,400 per tonne may well cap the upside until the fundamentals tighten.
We expect the fundamentals to tighten but there has been little sign of this happening given movements in LME stocks. Since last Tuesday’s 43,625 tonnes of warrant cancellations in Europe, only 50 tonnes of lead has left warehouses. As we said last week, such a large warrant cancellation speaks of a trading strategy rather than a fundamental shift. Reports suggest it is merely a paper play and that the cancelled warrants may not leave warehouses. The retreat in the price suggests the market thinks this too.
The cancellation means the 59% of LME stocks are now cancelled compared with 36% a week ago. Available stocks are now just 77,925 tonnes. This situation could lead to a sudden increase in tightness.
The reduction in available metal tightened the cash/threes spread to $0.25-1.25 per tonne backwardation at one stage last week. But the spread has reverted to a contango; it was recently quoted at $20-10c. Last week’s blip higher in prices therefore seems to have been driven by a bout of short-covering. The LME warrant holding report shows some large position holders, with two entities collectively holding 60-789% of the warrants and an equivalent sized tom position.
When we looked at option open interest last week on $2,400 April calls, there were 1,244 lots. This has since shrunk to 934 lots.
We feel that lead prices are already fairly high and that it would take more evidence of a supply deficit, such as a drawdown in exchange stocks, before prices can push higher above $2,400 per tonne. But for now we would continue to look for the $2,200-2,400 range to hold. The run-up in lead stocks in Shanghai and what follows in the aftermath of the LME warrant cancellations needs to be watched carefully; we wait to see if stocks start to fall once we enter the second quarter.