November/December 1992
Metal experts summarized current market events and took a poke at projecting the future for lead and zinc at a recent roundtable.
BY ROBERT J. GARINO
Robert J. Garino is director of commodities for the Institute of Scrap Recycling Industries (ISRI) ( Washington , D.C. ).
Metal industry experts pulled no punches in delivering assessments of lead and zinc markets at Scrap Processing and Recycling's Lead/Zinc Roundtable, held in late September in Chicago. While lead was characterized as "flat"—at best—over the near term, zinc's prospects offered even less near- or long-term comfort, with one speaker calling for zinc prices to drop to 28 or 29 cents per pound in the next 18 months.
Zinc Gets Volatile
Although cash price for zinc on the London Metal Exchange (LME) (London) had increased steadily from a low of just more than 50 cents a pound in January to around 60 cents a pound at the time of the roundtable, the rise owes much to "technical factors," emphasized Pierre Neatby, manager of North American zinc metal sales for Noranda Sales Corp. (Toronto). Speculative trading activity on the exchange—as opposed to physical activity—he explained, has had a major influence on zinc prices in 1992.
Options, in particular, have had a substantial influence on the zinc market, despite the relatively small tonnage of metal involved, suggested Neatby. Brokers who accept options contracts cover their price exposure with a certain number of futures contracts, he explained. And as futures prices increase, the number of futures contracts needed to cover an options position also increases. Consequently, said Neatby, options are "creating leverage on the futures price," thus contributing to increased price volatility on the LME.
Moving away from the technical influences to focus on supply and demand, Neatby pointed to huge surpluses of zinc worldwide, noting that, as zinc prices moved higher during the first nine months of 1992, so did stocks. Between January and September, in fact, LME stocks had increased almost 200,000 mt (metric tons), he noted. Much of this transfer of metal to the LME can be attributed to traditional Western to zinc producers who were attracted to a persistent backwardation, and reduced their own stocks by 39,000 mt, according to Neatby. Zinc exports from nontraditional sources in the former Soviet Union, China, Poland, and Korea have also to piled into LME warehouses, he said.
The trend toward higher inventories would continue for the balance of 1992, Neatby predicted, pushing zinc prices down to an average of 57 cents per pound for the fourth quarter.
Although Noranda forecasts zinc consumption to grow 2 percent per annum this decade, Neatby conceded that overall world consumption has been "flat in the last four years." Consequently, he said he expects a zinc surplus until 1994, replaced by a metal deficit for 1995 and beyond.
Is It Doomsday for Zinc?
Following Neatby's discussion of zinc prices, the roundtable audience was stunned by a bomb tossed by Peter Goodburn, director of Waterside Futures Ltd. (London), who suggested that zinc is in a protracted bear market. Although zinc has experienced several downward corrections since visiting a $2,500-per-mt (about $1.38 per pound) high in 1989, a new—and final—bottom will hit in the next 12 to 18 months, Goodburn predicted. In fact, he said, there is a "very real danger that LME cash zinc will continue to decline toward $513 to $521 per mt"—approximately 28.5 cents per pound—over this period.
While calling this price outlook "extreme," he said he is convinced that his methodology—employing the Elliott Wave Theory (see "Watching the Wave," on page XXX)—will ultimately prove correct.
Previous predictions made using the theory have proved remarkably accurate in picking both the highs and lows in the zinc market over the cycle, he reported.
Cutbacks in production and mine closures will be the seeds for the development of the next bull market for zinc, Goodburn concluded. But, should his overall forecast prove correct, many attendees wondered whether there would remain a zinc industry on which to build.
Lead: A Look at `Other' Uses
As those familiar with the U.S. lead industry know, lead-acid batteries are the dominant application for the metal. In 1991, batteries accounted for more than 1 million mt ofU.S. lead use—or 81 percent of total domestic lead consumption, according to the U.S. Bureau of Mines. Because of this dominance, other end-use markets for lead are often less well-understood, so lead experts at the roundtable targeted these "other" lead uses in their presentations. Of the 239,000 tons of lead consumed annually in nonbattery applications in the United States, 118,000 tons goes toward fabricated products, according to Kenneth Mardick, executive vice president of Mayfield Manufacturing Co. (Birmingham, Ala.). He listed the principal markets and their current annual demands as follows: ammunition, 36,000 tons; solder, 35,000 tons; sheet lead, 22,000 tons; lead castings, 16,000 tons; and lead pipe, 4,000 tons. Approximately 55 to 60 companies with a combined estimated annual sales volume of $235 million account for the consumption of this lead, Mardick said.
The fabricated lead products industry has contracted over the years, he noted, mainly as a result of product substitution encouraged by regulatory pressure to reduce lead use. The most dramatic loss has been in plumbing applications, where lead use in pipe caulking, for example, has dropped from 175,000 tons annually in the early 1970s to approximately 3,000 tons today, he said. Furthermore, 50/50 (tin/lead) solder, used with copper water pipes, has been eliminated from the marketplace. Regulatory pressure is expected to continue, Mardick said, noting that several current legislative initiatives could further harm the entire lead industry.
Despite the existence of what he considers a bias against lead use, several lead-use applications hold promise for growth, according to Mardick. These uses include roofing and waterproofing products, lead sheet use as a radon barrier, lead shielding in medical applications, and use related to storage of spent nuclear fuel. He suggested that these new or growing markets will eventually add hundreds of thousands of tons of annual lead consumption.
The near-term direction of the lead market is likely to be guided by growing inventories of refined metal held in LME warehouses, Mardick predicted. Calling domestic demand "stagnant" and noting that "the European situation is not much better," he concluded that the prospects for lead appear flat to downward." He recognized, however, that strikes, production cutbacks, or severe weather could temper his cautious outlook.
Looking at Lead Oxides
Summarizing markets for lead oxides, Larry Bartlett, executive vice president of O&C Corp. (Indianapolis), noted the importance of storage battery demand, pointing out that black oxide, or battery oxide, which is 95-percent lead by weight, is "by far" the largest market for any lead oxide—absorbing more than 80 percent of the lead oxide produced annually in the United States. He predicted an even larger market in the future for battery oxides as a result of expected growth in demand for electric vehicles and industrial electrical applications, such as load-leveling.
Another important form of lead oxide is litharge, Bartlett pointed out, which is 93-percent lead metal by weight. Litharge is used in glass products, especially in crystal glazes and frits (a type of glass used in ceramics). The radiance of crystal, he noted, is due to its lead content, which can be as high as 35 percent by weight. Litharge is also highly effective in absorbing radiation, he said, so television cathode ray tubes contain around 25- to 30-percent lead oxide.
The third basic form of lead oxide is red lead, which is 91-percent lead metal by weight. Because this oxide's traditional uses in paints and pigments are gradually being legislated out of existence, its use has been reduced to a few ceramic applications and as an additive to the positive plate in lead-acid batteries, Bartlett reported.
Touching on the long-term direction for lead oxides in nonbattery uses, Bartlett suggested that overall potential for growth appears limited. Nevertheless, he identified a potentially promising new market: use as an antioxidant compound in asphalt, which has been shown to double the life of the product, he said. He also echoed Mardick's assessment that lead should see an expanded role in the encapsulation of nuclear wastes.
Bartlett concluded, however, that while the potential for these two relatively new markets is huge, actual increases in lead consumption remain "iffy and a long way down the road."
Watching the Wave
So how did Peter Goodman come up with his 28-cent-per-pound zinc prediction? The answer lies not in conventional technical analyses, but in the Elliott Wave Theory, a tool used to predict mass psychological behavior, in the process identifying and predicting turning points in metal commodity markets.
In a paper distributed at the roundtable, Goodburn noted that the wave theory was developed by Ralph Nelson Elliott, who determined that "social, mass psychological behavior unfolds in a definite sequence of expansion, elation, and euphoria, followed by contraction, deflation, and depression." This pattern, according to Goodburn's explanation, "is repetitive, and can be identified within many different time cycles, from many years down to minutes."
According to Goodburn, a chart of any commodity, currency, or stock index can be viewed in terms of changes in mass psychology. Rather than using conventional analysis methods to predict price movements, the firm considers the chart a pictorial psychological record of how the masses are evaluating fundamental information.
The method involves identifying predictable waves of psychological development measured in respect to a larger trend using the Elliott Wave Theory. Then, Waterside combines this information with a mathematical formula developed by a 13th century Italian thinker known as Fibonacci, who is considered the greatest mathematician of the Middle Ages.
By observing natural phenomena, Fibonacci discovered a series of numbers called the "Summation Series," in which any number in the series divided by the subsequent number yields approximately the decimal value 0.618, which is called the "Golden Ratio." Waterside uses the Golden Ratio to forecast the length of waves as described by Elliott's theory.
The firm's analysts believe that trading strategies using the combination of wave theory and Fibonacci ratio can identify exact turning points in commodity markets. —R.J.G.
Metal experts summarized current market events and took a poke at projecting the future for lead and zinc at a recent roundtable.