The lead industry and lead price have been caught in an awkward situation of losses incurred by upstream smelting enterprises, a lack of intermediate traders, price-setting by downstream industries as well as price divergence between end products and raw materials. However, due to huge end demand and strong demand growth, lead price is expected to edge up.

The expansion of lead-zinc smelting capacity has been much faster than exploration and mining capacities of lead-zinc mine over the past few years. Amid fierce competition in the smelting industry, smelting cost has been trending down. Meanwhile, the price of upstream lead-zinc concentrate has been moving up due to depletion of mineral resources. As such, mineral resources have become more crucial in the whole industry. Those smelting-only enterprises are impacted seriously by price fluctuation during the procurement process. Falling smelting fees are expected to further depress the earnings of these smelters or even turn them into losses.

Prices of lead smelters’ main products like lead, gold and silver have been sliding in this year, notably silver has suffered from a severe magnitude of price drop and contraction in sales revenue. On the other hand, raw material prices surged due to tight supply, thereby trimming the processing fees charged by smelters. Such a double squeeze has led to a sharp drop in profit margin, so enterprises have turned to cut production and refrain from selling. Current prices are hovering around the cost level, so there seems little room for further price drop.

End demand for lead has come mainly from starter battery of automobile and power battery of electric bicycle. China’s automobile output amounted to 19.27 million units in 2012 and the automobile ownership totaled 120 million units. The automobile ownership is expected to reach around 140 million by the end of 2013. Each new car in the market requires one battery. Each starter battery in the replacement market has a life span of two years. (For taxi the life span is about one year and for private car nearly 3 years. The life span of original equipment battery is relatively long, and the change frequency of replaced battery tends to be high.)

Therefore, half of the automobiles in running require starter battery replacement every year. The proportion of original equipment demand and replacement demand is 22% and 78% respectively. Demand for starter battery in China reached 95 million kVAh in 2012, accounting for 54% of the storage battery production. The market demand for automobile starter battery over the next three years is projected to increase by 15% per annum. China’s automobile ownership is forecasted to reach 180 million by 2015.

Demand for starter storage battery is expected to rise on the back of the upcoming peak of battery replacement and the recovery of the automobile industry in the second half of this year. It is understood that the supply of automobile starter battery in China has been tightened since the fourth quarter. Distributors in general said this situation has reflected demand grossly outstripping supply. This unquestionably signifies tremendous downstream demand.

Leading starter battery manufacturers, Camel Group Co., Ltd. and Fengfan Co., Ltd. are projected to produce 16 million units and 11 million units respectively this year with output forecasted to rise further to 20 million units and 14 million units respectively next year.

Moreover, each of the mainstream electric bicycles in China requires one set of four batteries. Each battery runs with an average life span of two years. The demand for electric bicycle-related lead acid power battery amounted to about 300 million units (equivalent to 55 million kVAh) in 2012, accounting for 31% of annual battery output. The ownership of electric bicycles is forecasted to reach 220 million by 2015 with battery demand topping 80 million kVAh. Leaders of power storage battery industry, Chaowei Power Holdings Limited and Tianneng Power International Limited are projected to see their capacity to increase respectively from 43 million units and 48 million units in 2010 to 120 million units and 130 million units this year.

To sum up, the current ebb of lead prices, apart from the depressing effect of the pessimistic macro-economic environment, is also attributable to two other factors. The first one is that a lack of intermediate traders in the lead industry has caused a drop in the liquidity of lead, so fund flow has not shown any interest in the metal. The second one is that upstream enterprises in the lead industry are now suffering from losses, and the downstream enterprises have dominated price-setting. Absence of strong buying incentives has arrested the movement of lead prices, thereby constraining the volatility of the metal price.

However, lead exhibits the best fundamental quality in the base metal space. Based on Macquarie Research, the current global inventory consumption ratio is only 6 weeks, whereas that of copper is 9.4 weeks, zinc 14.7 weeks and aluminum 25 weeks. End demand for lead is expected to be stable with relatively huge growth prospects, so lead price is expected to rise.