November/December 1988
The bulls outnumbered the bears at this Chicago event, where speakers agreed that demand for both base metals has been outpacing supply.
By Robert J. Garino
Robert J. Garino is director of commodities for the Institute of Scrap Recycling Industries, Washington, D.C.
Supplies were termed tight at ReMA's Lead/Zinc Roundtable September 8 in Chicago. Strong demand drove both industries in 1988 as producers, merchants, and manufacturers anxiously looked to domestic and offshore suppliers. Prices responded accordingly.
"Mature" Automotive Battery Market
Daniel D. Breidegam, metals and materials manager, East Penn Manufacturing Company, Inc., Lyon Station, Pennsylvania, thoroughly analyzed the U.S. battery market. Breidegam's firm is one of the nation's largest privately held integrated battery manufacturers. He estimated his company's share of the domestic battery market at over 5 percent.
Breidegam observed that the lead-acid battery is the most feasibly recycled of any storage power option. The biggest question about recycling is not whether batteries can be recycled, he said, but "how to ensure transportation and keep enough smelters in operation to handle the amount of scrap that becomes available each year." While Breidegam believes that a commitment must be made to "meet or even exceed" OSHA and EPA standards, he argued that "there has to be some leniency on the part of the government. ... Regulating the industry out of business would create much more environmental hardship than working with the industry. ...."
Breidegam looked at both the automotive and industrial battery markets, e.g., materials-handling, mining, and load-leveling. With total primary and secondary lead consumption in 1987 at 1.35 million short tons, the battery market alone used over 950,000 short tons of metal, or over 70 percent, according to Breidegam. Of the tonnage consumed annually by the battery industry, approximately 10 percent (100,000 short tons) is used in industrial batteries, a market with good growth potential, he stated.
Breidegam called the automotive battery market (original equipment and replacement) "relatively mature" and noted that "forecasts show approximately 2 percent to 2 1/2 percent annual growth for the past five years [and for] 1987 to 1992." Recognizing both variations in new car sales and the impact weather has on replacements, Breidegam predicted the automotive-type battery market should grow to about 67 million units by 1992.
Current business is strong, according to Breidegam. Shipments of replacements for the first seven months of 1988 have run 2.3 million batteries above the comparable 1987 period, a 7.7-percent increase. Because of exceptionally strong summer battery sales, plus normal inventory accumulation, he said his company is experiencing a "near-term tightness for both primary and secondary lead."
A Change in the Weather
Battery marketers, continued Breidegam, are split into four major groups: battery specialists, who sell just over 30 percent of the total shipped annually, department discount stores at 24 percent, and parts distributors and automotive chains at about 30 percent. According to Breidegam, battery makers are seeing some shift in their business from the traditional wintertime busy season. The use of more electronic controls in autos, heavier use of air conditioning, plus a trend toward somewhat hotter summers and fewer long, extremely cold winters may be responsible for leveling out the demand between summer and winter months, he said.
Breidegam discussed the contribution by secondary lead smelters in meeting the total U.S. lead demand. In 1987, for example, he noted that the secondary lead industry supplied about 780,000 short tons of material, or almost 60 percent of the total production. He believes that this year secondaries will produce no less than 800,000 short tons. According to Bureau of Mines estimates, secondary lead capacity in the U.S. is 930,000 short tons; by the end of 1988, with new additions, total capacity could reach one million short tons.
New capacity notwithstanding, Breidegam's assessment of the U.S. secondary lead industry was very encouraging. Capacity, he said, is definitely increasing as more and more battery producers are asked to take responsibility for their returns. Perhaps because of this fact, he believes that "primary smelters have started looking at the feasiblity of using batteries as feedstock. …" Nevertheless, the challenge to meet required environmental regulations is a major concern. A number of companies will not survive if they do not accept the challenge, he warned.
Breidegam said supplies of lead are tight and the demand from battery producers seems to be coming much earlier in the season than usual. However, while supplier inventories may remain relatively low in the near term, he did not see a long-term shortfall of material, mainly because of the potential for increased import penetration.
Marketing Solder Under Environmental Pressure
Commenting on current legislation in the U.K. against the use of lead in industry, Nicholas Pocock, chairman, Base Metal Synergy Associates, North Humberside (London), England, concluded that at least part of the concern about lead could be categorized as "fear of the unknown" or "fear of the dark," and that "industry and the public should have more specific information on which to base action."
Pocock closely examined lead in solders, noting that in Europe, for example, the proportion of lead was actually increasing on the grounds of basic economics. He also observed that during the 1960s and 1970s, when less tin and more lead were used in solder, "people were growing taller, living longer and generally creating societies in which the life-styles were being maintained by fewer and fewer workers. …" He was not defending risks to health, but rather emphasizing that "there is a balance between concern for health and safety and concern for practical economics."
End-use Markets and Scrap Examined
Pocock reviewed the main end-use markets for solders: plumbing, automotive radiator and body work, canning, and electrical and electronic applications. The concern about the adverse affects of lead, according to Pocock, is usually expressed during the use or application of the solder at the production stage, or when production is finished and the assembly is scrapped.
Pocock's review of end-use markets contained little indication that more lead was being consumed in fabricated products, or that more lead-containing scrap was being reclaimed. Lead-free solders are being developed and applied in the automotive and plumbing industries, and advances in the electronics industry are causing further substitution and economy. Pocock characterized electronics as low-metal-containing with "no recoverable scrap value." On processing electronic scrap, Pocock warned that "specific techniques may be needed to separate and recover each metal as a potentially toxic constituent. …"
Despite concerns about long-term demand for solders, Pocock remained optimistic, mainly because lead is now being viewed "merely as one of a dozen or so metals coming under the spotlight" by U.S. or European authorities, materials that include many of the metals to which solder is joined. "If metals in general have a bright future," he reasoned, "we can expect some sectors of industry to find lead solders continuing to share it to a substantial degree."
Zinc Yesterday and Today
John J.L. Davies, senior vice president, Noranda Sales Corporation, Toronto, Ontario, looked at how far the zinc industry has come since the early 1970s.
According to Davies, in 1987 free-world zinc consumption reached a record high of 5.04 million metric tons (mmt), passing through the "elusive 5-million-ton level for the first time ever." In addition, consumption in 1987 was up "a respectable 3.6 percent from the previous year," surpassing the prior record held for 14 years. What that meant was that since the 1973 record, zinc had virtually no growth in demand.
The 1970s were strongly influenced by rises in energy costs and overall price inflation, Davies explained. Consequently, manufacturing industries in the major industrialized countries became steadily noncompetitive, while new production sources from low-cost developing countries came on the scene. More importantly, Davies believes that there was also an "accelerated long-term shift away" from heavy-material-intensive products and processes. The combined effects were disastrous for zinc producers.
Davies said the 1982-1984 recession was "a period that most of us in the base-metal industry remember. It was the closest we have come to a 1929-type collapse. ..." And, as in the 1930s, it has taken the zinc industry a long time to recover. Since that period, rising zinc demand in developing countries (particularly Southeast Asia) plus greater offtake by China have led to consumption increases, according to Davies. Further, the supply/demand fundamentals have improved since the mid-1980s--production has not kept pace with demand so stocks have steadily declined. As evidence, Davies cited producer stocks, which had fallen from more than 500,000 metric tons (mt) at the beginning of 1983 to 283,000 mt by June of this year.
Steel Industry Pacing Zinc Demand
Davies highlighted several changes in industry demand. Consumption of zinc in die casting, which fell throughout the 1970s, "has now stabilized and is showing signs of recovery," he said. For example, the automobile industry is using more zinc, according to Davies. He noted that, in 1986 and 1987, the U.S. steel industry opened six new galvanized lines in order to meet rising demand for galvanized steel used by the auto industry. As a result, he stated, much of last year's U.S. zinc consumption (1.05 mmt, 4.8 percent more than in 1986), may be traced to automotive demand. And, largely due to ongoing high demand for galvanized steel in the first half of 1988, zinc consumption is booming--"up 6.9 percent, a rate of growth last seen back in the 1960s," he said.
Davies discussed the roles of mine and smelter production in meeting world zinc demand. He does not expect to see much change in new mine output until 1990, when Cominco's massive Red Dog mine in Alaska becomes operational. There has been some new smelting capacity (in South Korea, for example) but, according to Davies, "there are no known expansions under construction anywhere in the Western World. …"
Bullish Forecast for Zinc
Looking ahead at supply, demand, and price, Davies concluded that productive capacity in Europe has stabilized, but some increases are expected for the rest of the world. Total metal production "will reach 5.40 million metric tons by 1991," he forecasted, "not much change from current levels," with mine production the limiting factor.
As for demand, Davies stated that zinc's largest end-use markets--transportation and construction--are subject to so many variables that making forecasts is risky at best. Still, the transportation sector is enjoying its sixth year of expansion and new capital-investment construction is rising. Demand for metals "will remain strong for another two to three years," he predicted, "and we are particularly bullish about zinc."
Davies reminded roundtable attendees that 80 percent of all zinc is consumed outside the U.S. and is sold at the overseas producer price (OPP), also referred to as the European Producer Price. This year the overseas price of zinc has increased from $860 per mt to $1,350 per mt, a 57-percent increase. At the same time, there is a move by the industry to price zinc on a free-market quotation represented by the London Metal Exchange (LME) overseas and Metals Week in the U.S. Since, for a good part of the year, LME values have been at a premium to the OPP, so-called free-market zinc prices, in reality, are rising faster than the producer price, he observed. In the U.S., consumers have been requesting the right to buy on the Metals Week average, so "it too has come under the influence of the free market," Davies said.
Davies thinks the price will peak over the next year and that "producer prices increasingly will march to the tune of the free market." In his view, zinc consumers will have to "learn the art of hedging. ... We may even see the day when COMEX [the Commodities Exchange] again lists zinc for trading on its market."
A Merchant’s Perspective: Higher Tags in the Offing?
A merchant's perspective of the zinc market was provided by Peter Hochschild, executive vice president, Hochschild & Company, White Plains, New York. Labeling near-term prospects for sellers bright, he addressed price, supply/demand fundamentals, and upcoming labor contracts--factors that are influencing the zinc market in the U.S. and Europe.
According to Hochschild, price is probably the most important factor, with the most visible prices being those of the high-grade and special high-grade zinc contracts on the LME. He also commented on the European Producer Price, the North American Producer Price and the U.S. Metals Week High-Grade Price.
"Did the market top in June?" he asked rhetorically. He stated that the zinc market was "trying to prove it's in good shape and that it has a very firm base in the $1,270- to $1,300-per-metric-ton range." Hochschild's personal view was that zinc will show additional strength by testing the "$1,600- to $1,650-per-metric-ton area within the 1988 calendar year." He added, however, that at that level, approximately 73-75 cents per pound, "pandemonium would set in since consumers would be reluctant to lock in exposure while producers would be trying to lock in forward sales."
A Return to $1.00 Zinc?
The second factor Hochschild saw as affecting the zinc market is current and projected supply/ demand balances. Citing latest statistics, he said Western World production for 1988 was 5.42 mmt against a total consumption of 5.22 mmt. Deducting net exports to Socialist countries, he continued, "we are left with a statistical deficit for the year of approximately 30,000 mt." Hochschild believes that the figure does not adequately take into account supply disruptions in North and South America. By his calculations, the 1988 deficit is closer to 80,000 mt. Given that supplies are already termed tight, Hochschild discussed areas that could "aggravate" the current market and continue its bullish trend.
Hochschild looked briefly at the implication for prices of the LME's new Special High-Grade contract. He believes that without sufficient inventory and liquidity, "the scene could be set for a market squeeze later this year." He does not see where the necessary stocks will come from, considering the current supply/demand balance. "Producers simply do not have any extra inventory at the moment," he warned.
Also aggravating the market, according to Hochschild, are the upcoming labor contracts at mines and smelters, contracts which are due to expire within the next year. He specifically mentioned Zinc Corporation of America (December 10, 1988); Big River Zinc (February 28, 1989); Noranda (November 1989); and Australia's Rosebury Mine. According to Hochschild, Noranda's Valleyfield output is 230,000 mt per year. This and Rosebury's output of 315,000 mt per year of concentrates "are likely to keep the market buoyant well into 1989," he reasoned.
Hochschild pointed out that "bull markets do not generally end with a whimper"; he believes zinc could reach "extreme levels of volatility or a final blast-off" before the market turns bearish. Citing 1974, when the market traded up to $1.00 a pound, he said "markets have the habit of returning to past levels of resistance."
The bulls outnumbered the bears at this Chicago event, where speakers agreed that demand for both base metals has been outpacing supply.