Lead prices will continue to fall under pressure, and short-term production is unlikely to change the lead market surplus.

　　Recently, overall metal prices have declined, but the lead market has remained relatively resilient, continuing to trade within a range-bound fluctuation. Although multiple factors, such as environmental protection and downstream production cuts, are interfering, it is expected that the shrinking supply will still be weaker than the weak demand, and lead prices will continue to fall under pressure in the later period.

　　Weak primary lead support

　　China's primary lead market supply consists of primary lead and recycled lead, with a ratio of approximately 6:4. Primary lead is made from lead concentrate, and recycled lead is made from recycled lead-acid batteries. Over the past two years, due to the sharp drop in lead prices, mine production has been reduced, investment in fixed assets in mines has declined, and China's output has been reduced due to the tightening of environmental protection. Lead concentrates have continued to tighten. Domestic ore processing fees fell from 1,700 yuan per ton in July to 1,100 yuan per ton in December, a decrease of 50%. Imported ore processing fees have returned to a historical low of $10 per ton. Due to tight supply constraints, China’s primary lead production has declined.

　　This year, the industrial structure of the recycled lead market has been optimized, environmental protection and industry entry barriers have been increased, and illegal production capacity has been converted to legal production capacity. The concentration of the industry is increasing. The increase in the operating rate of large-scale smelters has driven output growth, and the operating rate of recycled lead smelting companies has increased to 70%–80%, compared with less than 60% in the same period last year. Especially in the fourth quarter of this year, more than 200,000 tons of new lead production projects were launched. Although the output was not completely released, the output of recycled lead showed an increasing trend. Therefore, due to the replenishment of recycled lead, the support of lead prices for lead prices is weakening.

　　Rapid inventory increase

　　Downstream lead consumption is relatively concentrated, and the demand for lead-acid batteries accounts for more than 80%. In the past two years, the lead-acid battery industry has faced greater policy shocks. Since 2016, a consumption tax of 4% has been levied on lead-acid batteries. Others, such as lithium-ion batteries and solar cells, do not need to be levied. This has formed a significant competitive disadvantage for lead-acid batteries. At the same time, the exit schedule of traditional fuel vehicles has been put on the agenda, and the rapid development of new energy vehicles has become a trend, which poses a challenge to traditional lead-acid batteries. Environmental protection has led to further optimization and upgrading of the lead-acid battery industry, which has led to insufficient new consumption highlights in the lead market.

　　In the first half of this year, lead-acid battery companies lacked motivation to replenish stocks due to overdraft consumption in the early stage, and the company's operations began to decline rapidly, and demand gradually recovered in the second half of the year. Recently, Shandong Province has issued a warning about severely polluted weather, and some enterprises have reduced production. Due to the difficult improvement on the demand side, lead stocks and social stocks of the Shanghai Futures Exchange rose rapidly from 16,000 tons at the end of September to 43,000 tons at the beginning of December. According to our survey results, smelter inventory is higher than the average standing inventory level. Therefore, rising inventory will weigh on prices.

　　Limited production impact

　　In December, air pollution in northern regions intensified due to the heating season. Henan, the country’s largest lead-producing province, has entered the final sprint phase of its province-wide campaign to combat atmospheric pollution. According to our research, the shutdowns and production restrictions imposed on enterprises primarily affect production lines that were already underutilized to begin with, so the impact is likely to be relatively limited. Meanwhile, Anhui, the province with the largest recycled lead output, is experiencing tight natural gas supplies, which have disrupted production at some enterprises in Taihe County, leading to a slight reduction in output. Overall, short-term production restrictions are unlikely to reverse the oversupply situation in the lead market.

　　Overall, we believe that in the short term, upward momentum in lead prices is likely to be constrained or insufficient due to weak demand, while downward pressure is limited by environmental regulations. As a result, Shanghai lead prices are more likely to fluctuate around the key psychological level of 18,000 yuan per ton. Given that the earlier bottoming of inventories and peaking of prices are gradually being confirmed, the lead market will face increasingly pronounced oversupply in the later stage, driven by expectations of increased production from recycled lead and weakening consumption. Consequently, prices may come under downward pressure.

— Excerpted from China Economic Herald