Testing times for lead

31 Mount Pleasant, London WC1X 0AD UK

Tel +44 20 7903 2000 Fax +44 20 7837 0976www.cruanalysis.com

LONDON | BEIJING | PHILADELPHIA | WASHINGTON

Testing times for lead

Neil Hawkes - CRU

13th Asian Battery Conference, Macau, China (1-4 September 2009)

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

3,000

3,200

3,400

3,600

3,800

4,000

Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07

$ per tonne – LME 3-months lead price (daily)

What goes up…

$1,000 level

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

3,000

3,200

3,400

3,600

3,800

4,000

Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08


…came crashing back down…

$1,000 level

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

3,000

3,200

3,400

3,600

3,800

4,000

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09


…but regaining some lost ground this year

$1,000 level

Presentation outline

Collapse – story behind price fall to late 2008 low

Recovery – story driving price rise in 2009

Outlook – where do prices go from here ?

Collapse in lead prices

Lead industry fundamentals

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

-300

-200

-100

0

100

200

300

400

500

600

Strong global lead demand growth in mid-2000s…

‘000t lead consumption – annual total (global) ‘000t lead – yr-on-yr chg

Annual - LHS

Yr-on-yr change - RHS

Trendline growth

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

-300

-200

-100

0

100

200

300

400

500

600

…slower growth in 2007-2008


Annual - LHS


Trendline growth

-300

-200

-100

0

100

200

300

400

500

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Much weaker demand performance once China is separated

‘000t lead consumption – year-on-year change

China

Rest of the world

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

-400

-300

-200

-100

0

100

200

300

400

500

600

700

Global refined lead output growing at quicker pace…

‘000t lead production – annual total (global) ‘000t lead – yr-on-yr chg

Annual - LHS


Trendline growth

-300

-200

-100

0

100

200

300

400

500

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

…with RoW rejoining China on upward path

‘000t lead production – year-on-year change

China

Rest of the world (RoW)

-350

-300

-250

-200

-150

-100

-50

0

50

100

150

200

250

300

350

400

1990 1995 2000 2005

World balance

FWW balance

‘000 tonnes of refined lead

Market moved back into surplus in 2008…

Record deficit in 2004…

…turns to surplus in 2008


Lead industry fundamentals – recent swing from deficit back into surplus is latest in a cyclical pattern

External influences

Investment funds have played a major role in scale of price swing

Retreat from commodities driven by:

Financial crisis and economic slump – switch to safer assets

Relatively small reallocation of vast pool of fund money had big impact on metal prices…

…particularly one as illiquid as lead

‘Fund mood map’ reveals switch to more bearish ‘blue’ tactics in 2008 across LME complex

Open Rising

Interest Falling

P r i c e sRising

New Buying Short Selling

Long LiquidationShort Covering

Falling

Aluminium

Copper

Zinc

LEAD

Nickel

Tin

3 1 1 4 3 4 2 4 3 3 4 3 4

3 1 1 4 2 3 2 4 4 4 4 3 3

4 1 1 4 4 3 4 1 4 4 4 1 3

3 2 2 4 4 4 4 1 4 3 3 3 3

4 1 1 4 4 3 4 4 1 4 3 4 2

4 1 1 1 2 3 2 3 3 3 4 4 4

D-07 J-08 F-08 M-08 A-08 M-08 J-08 J-08 A-08 S-08 O-08 N-08 D-08

0

100

200

300

400

500

600

700

800

Aug-0

3

Nov-0

3

Feb-0

4

May-0

4

Aug-0

4

Nov-0

4

Feb-0

5

May-0

5

Aug-0

5

Nov-0

5

Feb-0

6

May-0

6

Aug-0

6

Nov-0

6

Feb-0

7

May-0

7

Aug-0

7

Nov-0

7

Feb-0

8

May-0

8

Aug-0

8

Nov-0

8

LME 3-months prices, index to 1 August 2003* = 100

ZincCopper

Lead’s star performance crashes back to earth

Lead

Nickel

Aluminium

Tin

* Approximate starting point of LME metals price rally


Lead industry fundamentals – recent swing from deficit back into surplus is latest in a cyclical pattern

External influences - investment fund money flowing out of wider commodity complex has exaggerated scale of downswing in lead prices





Investor appetite has returned to commodities

Return to commodities driven by:

Belief that worst ravages of economic slump and credit crunch over – switch to riskier assets

Betting early ‘green shoots’ will translate into more solid economic growth – China joined by the rest of the world

Once again, relatively small reallocation of vast pool of fund money has had relatively big impact on prices

CRU’s ‘fund mood map’ suggests fresh wave of new buying since April 2009

Open Rising

Interest Falling

P r i c e sRising



Falling

Aluminium

Copper

Zinc

LEAD

Nickel

Tin

4 3 4 3 4 2 1 4 1 2

4 3 3 2 2 2 1 2 2 1

4 1 3 3 1 2 1 1 1 2

3 3 3 2 4 2 1 1 1 1

3 4 2 2 4 3 1 2 1 1

4 4 4 1 1 4 1 1 1 4

O-08 N-08 D-08 J-09 F-09 M-09 A-09 M-09 J-09 J-09

Open Rising

Interest Falling

P r i c e sRising



Falling

60

80

100

120

140

160

180

200

220

Jan-0

9

Feb-0

9

Mar-

09

Apr-

09

May-0

9

Jun-0

9

Jul-09

Aug-0

9

LME 3-months prices, index to 2 January 2009 = 100

Zinc

Copper

Lead and copper vie for best performers on LME this year

Lead

Nickel

Aluminium

Tin

Recovery in lead prices

External influences - investment fund money flowing back into commodities has exaggerated scale of upswing in lead prices

Lead industry fundamentals – what physical evidence is there to support investor enthusiasm ?

Non-battery uses22%

Batteries78%

Data:CRU report – ‘What is the future for lead consumption? (2007)’

Batteries account for over three-quarters of global lead demand

* 2005 estimates

Non-battery uses22%

Batteries - Industrial29%

Batteries - SLI OE9%

Batteries - SLI replacement

40%

Data:CRU report – ‘What is the future for lead consumption? (2007)’

Batteries account for over three-quarters of global lead demand – SLI replacement ~40%

* 2005 estimates

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0

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1990

1991

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2007

2008

2009

And Chinese demand has continued to grow this year…


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0

100

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1990

1991

1992

1993

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1996

1997

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2004

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2007

2008

2009

…but the rest of the world continues to fall away…


China

Rest of the world

2,000

3,000

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5,000

6,000

7,000

8,000

9,000

10,000

1990

1991

1992

1993

1994

1995

1996

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1998

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2001

2002

2003

2004

2005

2006

2007

2008

2009

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0

100

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600

…leaving global demand falling for the first time since 2001


Annual - LHS


Trendline growth

Mounting list of primary smelter cuts

Lead primary smelter cuts* ('000t refined lead)

Company Plant Country 2008 2009 Comments

Boliden Ronnskar Sw eden -12 Treating more e-scrap and less lead feedDoe Run Herculaneum USA -31 -22 Closed one of tw o furnaces in Nov 2008Sometra Copsa Mica Romania -7 -19 Idled in late January 2009KCM Plovdiv Bulgaria -6 Reduced target for 2009 outputVarious** various Japan -2 -16 Trimming f iscal 2008-09 year targetsDoe Run La Oroya Peru -84 Temporarily idled due to f inancial problemsPenoles Torreon Mexico -37 Disrupted by strike action in 1H2009Glencore Porto Vesme Italy -25 Idled since start of May 2009

Total -52 -209

Data: Company announcements, CRU . *excludes China. ** mainly Toho Zinc.

More subtle trimming of secondary lead output

Alongside the more widely reported primary cuts, more subtle trimming of secondary lead output at FWW smelter has been key

Faced with weaker sales, smelters unwilling to chase the last tonne of scrap too hard…

…particularly amid higher scrap prices

-300

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-50

0

50

100

150

1990

1991

1992

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2004

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2006

2007

2008

2009

Y r-on-yr chg - secondary (RHS)

Y r-on-yr chg - primary (RHS)

So, Western primary plummet and secondary slip this year…


-300

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-100

0

100

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300

400

500

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

…China still growing, but bigger drop in RoW…


China

Rest of the world

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

-400

-300

-200

-100

0

100

200

300

400

500

600

700

…leaving global lead output falling for first time since 2001

‘000t lead production – annual total (global) ‘000t lead – yr-on-yr chg

Annual - LHS


Trendline growth

-100

-50

0

50

100

150

200

1Q

2003

2Q

2003

3Q

2003

4Q

2003

1Q

2004

2Q

2004

3Q

2004

4Q

2004

1Q

2005

2Q

2005

3Q

2005

4Q

2005

1Q

2006

2Q

2006

3Q

2006

4Q

2006

1Q

2007

2Q

2007

3Q

2007

4Q

2007

1Q

2008

2Q

2008

3Q

2008

4Q

2008

1Q

2009

2Q

2009

-100

0

100

200

300

400

500

600

700$/t

Chinese lead price premium over LME lead cash price (RHS)

Chinese switch from exporter to importer driven by wider Chinese price premium over LME

Chinese net trade in refined lead (LHS)

‘000 tonnes refined lead

Net exports

Net imports

Higher Chinese imports – but mainly for accumulation

Widespread stockpiling of local production has inflated local prices

Most of higher imports reflects opportunistic arbitrage buying than any genuine urgent consumption need

Higher Chinese prices prompting primary supply response

Alongside slower summer demand, lower local premium reducing inflow

China to remain more significant net importer…

…playing major part in reducing scale of FWW surplus

-350

-300

-250

-200

-150

-100

-50

0

50

100

150

200

250

300

350

400

1990 1995 2000 2005

World balance

FWW balance

‘000 tonnes of refined lead

Market surplus shrinking in 2009, mainly in West

2009

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Ja

n-0

3

Ap

r-0

3

Ju

l-0

3

Oct-

03

Ja

n-0

4

Ap

r-0

4

Ju

l-0

4

Oct-

04

Ja

n-0

5

Ap

r-0

5

Ju

l-0

5

Oct-

05

Ja

n-0

6

Ap

r-0

6

Ju

l-0

6

Oct-

06

Ja

n-0

7

Ap

r-0

7

Ju

l-0

7

Oct-

07

Ja

n-0

8

Ap

r-0

8

Ju

l-0

8

Oct-

08

Ja

n-0

9

Ap

r-0

9

Ju

l-0

9

0

25

50

75

100

125

150

175

200$ per tonne – monthly average

LME stocks climb in 2009

‘000t lead – end of month

LME cash price - LHS

LME stocks - RHS

Recovery in lead prices

External influences - investment fund money flowing back into commodities has exaggerated scale of upswing in lead prices

Lead industry fundamentals – are mostly supportive of higher prices, but not to the full extent that they have rallied





So where next?

Fund activity will continue to determine scale of price moves

BUT…. lead’s own fundamentals will determine the direction

Supply is responding to weaker demand…

…but still no more than hope that lead demand may start to recover anytime soon outside China

Still a lead market surplus

Ebb and flow of fund money will continue to pull lead prices around in wide trading range

In such volatile trading, further price spikes higher into $2,000s seem almost inevitable…

…but dips down below $1,500/t also still possible

And reasons to be bullish in the longer-term ?

Lead industry supply/demand dynamics will ultimately determine lead prices in the longer-term…

Series of structural changes that depressed prices have eased…

…replaced by more bullish dynamics:

1. Cost of producing lead is higher

2. Stronger demand growth, driven by China

3. Primary lead struggle to fill ‘gap’

4. Market imbalances larger and longer will fuel greater fund interest, making for greater price volatility

Price to remain cyclical, but in higher range than before

0

500

1,000

1,500

2,000

2,500

3,000

1970 1975 1980 1985 1990 1995 2000 2005

$ of the day

2008$

$ per tonne – LME cash lead price (annual average ) ?

31 Mount Pleasant, London WC1X 0AD UK

Tel +44 20 7903 2000 Fax +44 20 7837 0976www.cruanalysis.com

LONDON | BEIJING | PHILADELPHIA | WASHINGTON

Thank you for listening

Neil Hawkes, Lead market analyst - CRU

Tel no. +44 20 7903 2101

Email. [email protected]

Documents

Testing times for lead