||2,336 20 DMA
||2,459 2017 high (Feb)
||2,375 50% Fibo of the 2007-2008 downtrend
||2,577 2016 high (Nov)
||2,733 61.8% Fibo of the 2007-2008 downtrend
||2,254 50 DMA
||2,000 Psychological level
||1,997 200 DMA
||1,552 2015 low
Lead is trading between its 20 DMA and its 50 DMA. Although the break below the 20 DMA may indicate worsening sentiment, we are willing to stay friendly toward lead over the very short term (around one month) as long as prices remain above $2,200 per tonne (slightly below the 50 DMA).
Over the long term, we continue to see a bullish breakout pattern after the break of the DTL (see monthly chart). We would see a monthly close above the 50% Fibo of the 2007-2008 downtrend as a signal that the market is ready to enter a new bull market.
On the upside, we see the next resistance at the 50% Fibo of the 2007-2008 downtrend. On the downside, the break below the 20 DMA may result in additional selling pressure towards the 50 DMA and ultimately the 200 DMA.
LME lead has rebounded strongly so far this week after falling roughly 6% last week, underperforming its peers, despite somewhat bullish ILZSG data (see below).
The rebound seems to have been caused by short covering rather than fresh buying. The short covering started last Friday when prices were lower lower prices, indicative of low conviction among shorts to hold onto positions. We will pay close attention to the forthcoming LME COTR to better assess spec behaviour.
Last week’s sell-off in LME lead prices makes sense when noticing that speculators became too bullish on the metal at the start of the year. According to the latest LME COT statistics, net speculative positioning in LME lead has climbed the most in the base metals so far this year, up about 56%.
Still, given the renewed interest in global reflation-oriented trades due to strong leading macro indicators, especially in China (which accounted for around 42% of refined demand last year), the sell-off is unlikely to continue. We expect some buying on the dips to ensue. We will pay close attention to changes in open interest in the followin days.
The automotive sector, a driver of markedly higher global demand for refined lead last year, may disappoint this year because of China. Indeed, China passenger car sales may weaken after the government decided to raise the sales tax for 2017. Recent official data shows that car sales dropped 9.8% in January from a year ago, corroborating this view. But the EU market may offset partially weakness in the Chinese market. According to the ACEA, EU passenger car registrations rose 10.2% in January from a year ago.
The global supply of lead concentrates continues to tighten, judging by TCs falling to multi-year lows. Although the global refined market was resilient in 2016, as the rise in global refined output shows, we would not be surprised if refined production growth slows in the coming months on lower Chinese output, with China’s environmental protection department ordering domestic cuts.
Flows in visible stocks (LME & SHFE):
Visible inventories have picked up overall again since December 2016 (up on the SHFE, down on the LME), suggesting a loosening of the supply/demand balance, which may cap the price upside.
- LME lead stocks – at 189,800 tonnes as of February 20 – are little changed (+750 tonnes or 0.4%) so far in February (including an increase of 1,175 tonnes last week), after they dropped by 5,850 tonnes or 3% in January. In the year to date, stocks are down 5,100 tonnes or 3% after they rose 3,250 tonnes or 2% in the whole of 2016.
- SHFE stocks – at 61,946 tonnes as of February 17 – are up 15,675 tonnes or 34% so far in February (including an increase of 12,473 tonnes or 25% last week) after rising 17,545 tonnes or 61% in January. In the year to date, stocks are up 33,220 tonnes or 116% after they climbed by 16,652 tonnes or 138% in the whole of 2016.
- The ILZSG estimates that the global refined lead market was in a surplus of of 11,000 tonnes in the whole of 2016 (including a deficit of 5,500 tonnes in December) after recording a deficit of 23,000 tonnes in the corresponding period of 2015.
- The surplus for 2016 was smaller than that expected by the ILZSG at 42,000 tonnes.
- The ILZSG expects a surplus of 23,000 tonnes this year, according to its forecast released in October last year.
We remain friendly towards lead over the very short term but may turn neutral in case of a firm break below $2,200 (slightly below the 50 DMA) because this would suggest that momentum, which has been friendly until now, is turning against us.
We are neutral on lead for the first quarter, feeling that the rebalancing process may falter while risk aversion grows. This is likely to trigger some profit-taking in lead, especially when taking into account the currently excessive spec positioning.
We have a neutral medium-term view because prices at current levels are likely to prompt a temporary supply response, while the physical market is set to remain muted. But over the long term we are fundamentally constructive because we think the tightness in the global concentrates market will progressively spill into the global refined market.