Lead and Zinc Struggle to Recover

Attendees at a recent roundtable reviewed the sobering state of their metal markets and found a few glimmers of hope for 1992.

By Robert J. Garino

Robert J. Garino is director of commodities for the Institute of Scrap Recycling Industries (Washington, D.C.).

Has the recession bottomed out? When will demand reappear? Will prices rise in 1992? These and other questions were addressed at the Lead/Zinc Roundtable, sponsored byScrap Processing and Recycling and held in Chicago in September.

While the current lead and zinc markets are far from robust, the roundtable speakers did see some signs of hope for next year. Metal executives were told to expect continued low prices and sluggish demand in the near term, but, according to roundtable speakers, the long-term outlook for both metals is positive, with 1992 serving as a transitional year of gradual improvement.

Lead Market on the Rebound?

Edward M. Yates, manager of market research for Cominco Ltd. (Toronto) reviewed lead supply from 1963 to present, noting that lead is drawn from three main sources: lead-only mines; multimetallic mines, which produce lead as a byproduct; and secondary sources. Output from lead-only mines, found mainly in Missouri, Morocco, and Sweden, grew 28 percent per year from 1963 to 1974 but has since declined approximately 4 percent per year, Yates observed. Western World supplies of byproduct lead from lead/zinc mines grew 2. 1 percent per year from 1963 to 1974, but subsequent output from such multimetallic mines has been flat, he said.

In contrast to the no-growth output of lead ores and concentrates, secondary lead production has been on the rebound since 1987, he noted, with about 330,000 metric tons (mt) of new capacity being added. U.S. secondary production capacity peaked in 1981 at around 1.1 million mt, then dropped by approximately 500,000 mt between 1981 and 1987 due to low lead prices and increasing environmental regulation, Yates said. He predicted that 1991 secondary lead production would drop only marginally, with smelters operating at about 90-percent capacity, which should increase demand for scrap lead--especially lead-acid batteries. (James Tunnell, vice president of Powerlab Inc. [Terrell, Texas], estimated the current capacity of North American secondary lead smelters at approximately 1.20 million tons [approximately 1.09 million mt] per year, while actual production is closer to 1.02 million tons [approximately 925,000 mt] per year.)

Lead-acid batteries will continue to dominate end-use consumption for lead, Yates stated. While the total Western World growth rate for lead to 1995 is estimated at 1.7 percent per year, lead-acid battery growth could reach 2.7 percent per year, he said, with all other uses remaining relatively flat. "Twenty years ago, batteries accounted for about 40 percent of Western World consumption," Yates noted, "but by 1995 they should account for approximately 65 percent." With no real substitute on the horizon for the lead-acid battery, this market share is likely to grow, he predicted.

At present, the lead market in North America is strengthening, Yates believes, as evidenced by rising premiums over London Metal Exchange (LME) prices. He asserted that both lead prices and world economic activity have bottomed out in 1991, which means that lead consumption will improve, with 1992 being a transitional year leading to stronger growth in 1993.

Tight Times for Secondaries

The current scrap battery market is tight, Tunnel said, due to high spent-battery recycling rates in recent years (Yates pegged the 1990 rate above 95 percent) and low reserves of scrap batteries. Virtually all scrap batteries are now coming directly from mass merchandisers that collect old batteries from customers who purchase new ones, rather than from past inventories.

In the last year, Tunnell pointed out, scrap battery prices have trended lower, but not as much as transacted lead prices. Consequently, the spread between raw material costs and selling prices has narrowed to the point where domestic producers' total cash costs, excluding such factors as depreciation and capital charges, exceed the selling price for refined lead. With LME lead selling for less than 25 cents per pound, "all domestic secondary lead smelters are losing money," Tunnell stated. At the same time, however, the premiums for refined lead being offered to consumers in October and November have provided some breathing room for domestic smelters.

Environmental Concerns

Avoiding environmental liability is "the name of the game for all participants in the lead industry," said Tunnell, whose firm recently opened a new secondary smelter--Tejas Resources Inc.--which has a target production capacity of approximately 33,600 tons per year, to be extracted from scrap lead-acid batteries.

One major environmental concern for all secondary smelters is preventing contamination of the plant site, as well as surrounding areas, he said, noting the abundance of local, state, and federal regulations that ensure that this remains at the forefront of a smelter's considerations. In addition, he pointed out, worker exposure to lead must be within limits established by the Occupational Safety and Health Administration, and slag--a byproduct of smelting--must be disposed properly. Fortunately, Tunnel said, secondary lead slag "tests nonhazardous by Environmental Protection Agency standards and thus may be disposed in an industrial landfill.

Zinc Consumption Drops While Supplies Grow

Edward Schmidt, president of Big River Zinc Corp. (Sauget, Ill.), reviewed world zinc fundamentals, noting that North American producers account for 1.384 million mt of the 6.000 million mt of annual slab zinc capacity in the Western World. Breaking it down further, he noted, the United States has 372,000 mt of annual capacity, Mexico 235,000 mt, and Canada 777,000 mt.

Asian producers, however, will likely show the most significant growth in coming years, he said, with Asian smelting capacity projected to grow from 1.248 million mt in 1987 to 1.551 million mt in 1993. Schmidt noted that the world zinc industry is producing at 87-percent capacity, a "superb" rate compared with the domestic steel industry's 72.8-percent rate in the first eight months of 1991.

On the demand side, world zinc consumption in 1991 will be down 2 percent from 1990 levels, Schmidt predicted, while U. S. consumption will drop 5 percent from the 1990 level of 1.488 million mt.

Russ Richker, president of Western Zinc Corp. (Rancho Dominguez, Calif.), concurred, but he estimated that U.S. demand could drop as much as 9.5 percent from 1990 levels, primarily because of reduced demand for galvanized sheet by the domestic construction and automotive industries. Approximately 52 percent of zinc consumption is ked for galvanized products, both speakers noted.

The likely result of this drop in demand, Schmidt said, is a net zinc surplus of 146,000 mt. This, he said, would more than erase the 114,000-mt deficit accumulated in the previous three years, a situation that has resulted in average LME prices of only 51.67 cents per pound through August, compared with 68-89 cents in 1990 and 77.74 cents in 1989.

Zinc Prices Remain Low

Zinc's current prices are not far from the lows recorded in 1985 and 1986, when expressed in constant currency (U.S. dollars or German Deutsche marks), Schmidt observed. For world zinc prices to recover, world stocks-especially the highly visible LME holdings-must be reduced from the records established in 1991, he noted.

Richker also saw lower prices on the horizon: "Barring any unforeseen production problems," LME cash zinc will remain below the $1,050-per-mt level through the first quarter of 1992, and zinc prices will remain within $25 per mt of that amount through the second quarter of 1992. After that, assuming a return of business confidence and activity, there could be a “gradual upward trend in the third quarter of 1992," he said, adding that a potential strike in Canada next year could help accelerate this movement.

Regarding prices, Schmidt touched on the domestic zinc industry's shift away from using producers' list prices to an LME-based price, asserting that "the LME was always the best price indicator" and that publications that routinely carried price averages always lagged what was actually occurring on the terminal markets. He cited the "transparency" of LME zinc prices as a plus in marketing and noted that using the LME gives producers the option of hedging concentrate purchases. This service, in turn, can be extended to customers, allowing them to purchase forward zinc.

Scrap Stays Firm

Western Zinc and other zinc producers are currently paying higher prices for scrap, despite low prices for slab zinc, Richker said, not because they expect higher LME zinc prices in the short term but because there is less scrap available on the spot market. This shortage is due to lower industrial activity and the liquidation of scrap inventories in the past two years, he pointed out. Generation of zinc die-cast scrap, for example, is off approximately 15 to 20 percent compared to last year, Richker asserted.

Steady export demand has also added to the shortfall of die-cast scrap-more zinc scrap is being shredded rather than being removed and sold to domestic processors, he explained. In addition, automakers have been decreasing their overall use of zinc in production since 1970, which has further reduced scrap availability, particularly since scrap cars account for 60 to 80 percent of die-cast scrap supplies.

Meanwhile, prices for galvanizers' residues, expressed as a percent of the LME price, have "skyrocketed," Richker noted, mainly because the current recession has reduced the amount of material available. He also linked the higher prices to increased scrap competition from both domestic and overseas consumers.

Both zinc executives, however, anticipated increased supplies of scrap zinc and residues in the near term, partly stemming from five new galvanizing lines that are being planned. In addition, more aerospace firms will likely be releasing zinc-containing dies to generate cash, Richker predicted. Electric-arc-furnace dust could also represent a potential source of approximately 60,000 tons of zinc per year, Schmidt asserted. •