September/October 1992
Unpredictable supply, demand, and prices for lead and zinc continue to stymie efforts to discern the future of these metals.
BY SI WAKESBERG
Si Wakesberg is New York bureau chief for Scrap Processing and Recycling.
Predicting what will happen in the primary and secondary lead and zinc markets in late 1992 and early 1993 is about as easy as pinning a tail on the proverbial donkey. At least that's the impression given by lead and zinc executives around the world. In some instances, their responses are hopeful, even optimistic, as some point to strong showings in select markets and positive signs in others. At the same time, many industry officials are extremely cautious about speculating what the markets will do in the near term.
No wonder. Take zinc, for example, which has been defying the normal economic laws of price and supply. As zinc stocks on the London Metal Exchange (LME) (London) hit records levels, totaling 340,800 metric tons (mt) in late July, one would have expected zinc prices to be driven downward. Instead, spot prices zoomed to a 21-month high.
The market climbed to its steepest backwardation—the difference between spot and three-month prices—of the year in early June, approaching $200 per mt. This surprising scenario was interpreted by some as "maneuvers on the LME." The LME, in fact, had to intervene, imposing daily backwardation limits and penalties on those holding short positions who could not meet delivery dates. By the end of June, the backwardation had narrowed to $60 per mt. By late July, the market had returned to contango.
Zinc's Irregular Fundamentals
Even during backwardation, demand for zinc throughout Europe was good and the prospects for the industry appeared encouraging, according to Rudolf Muller, chairman of the executive board of Metaleurop GmbH (Hanover, Germany), one of the world's leading producers of lead and zinc. Recent figures from the International Lead and Zinc Study Group (ILZSG) (London) support Muller: World zinc consumption for the first five months of 1992—at approximately 2.3 million mt—was about 2.3 percent higher than consumption during the same period in 1991, according to the group.
In particular, Muller indicates, galvanized sheet use has increased, spurring zinc demand from galvanized sheet manufacturers. The Galvanizers Association (Sutton Coldfield, United Kingdom) affirmed this trend, noting that from 1986 to 1991, the U.K. galvanizing market grew 8.4 percent per year. Looking ahead, the ILZSG forecasts higher world consumption for zinc in 1992, a prediction that Muller supports.
These bullish highlights, while encouraging, cannot obscure the fact that North America has provided most of the recent strong demand, while Europe and Japan have showed weakening trends. The virtual disappearance of demand from abroad is evident in the U.S. zinc scrap export statistics for the first five months of 1992—19,420 mt compared with 34,808 mt for the comparable period in 1991, a drop of 44 percent. In fact, except for the United Kingdom and Portugal , which absorbed a trickle of zinc scrap, there were no other European buyers listed in April. Even Belgium , which had been a steady buyer of U.S. zinc scrap, was noticeably absent.
In contrast, the U.S. zinc market has been a shining star. Domestic demand for zinc in the first four months of 1992 rose about 22 percent to 344,000 mt, compared with 1991. Notwithstanding positive consumption in the United States , option orders from zinc producers, traders, and portfolio managers are said to have given LME prices a big push on the world market. In the options market, "producers and traders purchase an option to buy zinc at a fixed price at some point in the future, usually three months," says Julie Beatty of Resource Strategies Inc. (Exton, Pa.). "This forces other producers to 'cover' their positions in order to fulfill their delivery obligations, which, in turn, applies upward pressure on zinc prices."
Investment and pension fund buying has also funneled huge sums of money into the commodity markets, contributing to zinc's price jump, market sources say. "The buying reportedly has been motivated by short-term profit goals rather than a longer-term commitment to reviving world economics and industrial consumption," says Robert J. Garino, director of commodities for the Institute of Scrap Recycling Industries (ISRI) (Washington, D.C.).
Many also believe that the U.S. strength is supply-driven, based on projections that there will be labor problems when contracts run out at Cominco Ltd. (Vancouver, British Columbia) and Noranda Inc. (Toronto) later this year. There's also some apprehension that the backwardation that haunted the market in June may make another appearance in October—when three-month contracts from the summer come due—and potentially putting the market into a squeeze.
Zinc Production Up, Recycling to Rise
Discussing zinc production, Muller notes that "it's certainly not falling—quite the contrary." In the first five months of 1992, production of refined zinc totaled approximately 2.2 million mt, an increase of 11,000 mt from 1991 figures, according to ILZSG figures. Much of this gain is credited to output increases by Germany and Spain, which helped to offset reported shutdowns in Austria and elsewhere.
On the secondary zinc front, about 2 million mt of zinc was produced from secondary sources in 1991 (see table on page xxx), Muller says, and this number is bound to increase. "The overall increase of primary zinc metal consumption from 2.1 million mt in 1950 to 5.4 million mt in 1991, means that increasing amounts of zinc content will be available for recycling in years to come," he notes. When comparing quantities of zinc being recovered with average total consumption, Muller observes, "it's apparent that there are hardly any secondary zinc materials that are not being recovered."
He points out, however, that about 20 percent of the total primary zinc consumption goes into the brass industry, and this metal leaves the recycling circuit more or less for good. Another factor limiting the quantity of secondary zinc is that, unlike lead, zinc is rarely used in products with short lifetimes. "The lifetime of galvanized goods reaches 10 to 25 years," he says, while zinc sheet used in roofing and cladding can remain in use for more than 50 years.
Lead Maintains Even Keel
Like zinc, lead has seen some price improvement in recent months, albeit not at zinc's breathtaking pace. In terms of demand and production, however, lead has been relatively stable in 1992, with small dips and equally small gains. According to ILZSG figures, consumption of refined lead in the first five months of 1992 came to about 1.1 million mt, up 0.4 percent from the same period in 1991. The report indicates that European lead markets have exhibited weakness as consumption has fallen in Germany, the United Kingdom, Yugoslavia, and other countries. There has been a slight firming trend in Southeast Asia, as well as in Australia, the ILZSG reports, but the Japanese lead market is said to be "oversupplied" and demand has skidded. Muller says the weakening of the Japanese lead market has not significantly affected the European market, but he asserts that any economic improvement—anywhere in the world—would be helpful. Even so, European demand is expected to improve late in the third quarter, he says.
Taking a further look ahead, Muller expects "Western World lead consumption to surpass 5 million mt in 2000. By this date, the battery industry is expected to reach a share of about 75 percent of the total consumption."
Unlike consumption, lead production in the first five months of 1992 declined slightly—0.5 percent—to approximately 1.8 million mt from last year's total, the ILZSG notes. While Canada, Mexico, and Australia have increased their output, Europe and the United States have showed decreases, and Japan has remained constant.
New Life for Lead?
As the lead industry tries to gain momentum, it must grapple with rising LME lead stocks, which hit 150,400 mt in early August. There may be some supply disruptions that could reduce rising inventories, however, industry sources say. Most supply concerns center on the labor strike at Doe Run Co.'s (St. Louis) primary lead smelter in Herculaneum, Mo. The LME lead price responded to the strike, rising to about 31 cents a pound in early August, a noticeable improvement over May's price of approximately 24 cents a pound. Not surprisingly, secondary lead prices also began to climb, but industry members were no more convinced that these changes represented a permanent strengthening than they were that primary lead will be able to sustain these higher levels.
The effects of Doe Run's strike cannot be underestimated since it is only one of two domestic producers of primary lead. "There was certainly nothing on the demand side this summer to suggest that lead prices should be higher," notes ReMA's Garino. "The Doe Run strike certainly added life to the metal."
Prior to Doe Run's strike and the subsequent higher prices, the industry was laboring under oppressively low prices. These prices impinged not only the primary lead market but the scrap market as well, says Muller, since low prices deter collectors from accumulating scrap. Low prices also make it difficult for some producers to cover mining and smelting costs, he observes. As an example, he notes that Metaleurop has closed its 90,000-ton-per-year Santa Lucia primary lead smelter in Cartagena, Spain. The smelter's shutdown, he states, was principally the result of economics—"low lead prices, low profit margins, higher inventory costs, as well as a decline in demand for primary lead."
One reason for lead's low prices, Muller says, has been the heavy exports of primary lead from the former Soviet Union and other Eastern European countries. "Some of these tonnages have arrived in the West through traders," he notes. "A good portion has ended up in Germany, as well as on the LME." These shipments appear to be slowing down, however, he says.
Turning to the secondary lead market, Muller notes that approximately 2.2 million mt of secondary lead was used to produce 4.3 million mt of refined lead in the Western World in 1991. Approximately 90 percent of these secondary lead supplies—or 2 million mt—come from battery scrap, due to the relatively short lifetime (4.5 years) of an average battery, he explains. Other lead-containing products, such as cables and roofing sheets, have lower recycling rates because of their much longer lifetimes. When these products are recycled, the majority of the scrap is just remelted, Muller says, which means that about 400,000 mt of recycled lead from these products "is not taken into account in the official statistics. Nevertheless, remelted lead has to be added to the total recycling volume, which then amounts to 2.6 million mt in 1991."
The recycling of lead will increase continuously and such recycling "will become more and more important for producers, consumers, and, of course, the recycling industry itself," Muller asserts. "The basic processes of ore mining and ore smelting have always been much more difficult and complex than the remelting and recycling of used metals and process residues."
He notes, however, that environmental concerns—and the stringent regulations and legislation that accompany them—continue to haunt the lead industry, costing companies millions of dollars. Government officials must keep in mind the important role that recycling plays in preventing the dumping of raw materials when they draft their legislative and regulatory views, he advises.
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As the lead and zinc industries prepare to enter the fourth quarter of 1992, the shifting sands of these markets will surely keep executives guessing. Will zinc begin to abide by normal market fundamentals once again? Will it continue to ride the wave of success in the United States ? Meanwhile, will supply disruptions push lead prices higher? Will lead see demand improve during the fall "buying season"?
Stay tuned.
1991 Secondary Zinc Consumption
Quantity Consumed Consumer (metric tons) Percent of Total
Brass and bronze makers 640,000 32
Primary zinc producers 500,000 25
Chemical industry 420,000 21
Secondary die-casting
alloy producers 220,000 11
Secondary zinc smelters 220,000 11
Total 2,000,000 100
Unpredictable supply, demand, and prices for lead and zinc continue to stymie efforts to discern the future of these metals.