Funds pile pressure on lead as LME stocks hit 11-year high

Funds have built up record short positions on the London Metal Exchange (LME) lead contract.

This is not entirely surprising given the rapid deterioration in market optics.

LME inventories of the heavy metal have leapt to 11-year highs thanks to its accelerated deliveries into exchange warehouses over the last few weeks.

Indeed, the mass warranting of 67,350 metric tons on March 19 was the largest single-day stocks arrival event in the London lead market since at least 1998.

LME time-spreads have collapsed under the weight of surplus metal, the cash discount to three-month delivery flexing out to levels last seen in 1992.

Curiously, the only thing that hasn’t imploded is the outright price CMPB3, last at $2,115 per ton, which remains trapped in its long-standing $2,000-2,300 trading range.

FUNDS AMASS BEAR POSITIONS

Investment funds were bullish about lead’s prospects for most of last year, with long positions peaking in September when the price was challenging the upper end of its trading range.

After lead failed to break higher, positioning gyrated later in 2023 and the first two months of 2024 before turning decidedly bearish in March.

Investment funds were net short of the LME contract to the tune of 15,356 contracts at the close of last week.

It’s the largest collective bet on lower prices since the exchange started publishing its Commitment of Traders Report in 2018.

The only comparable flexing of bear muscles by the investment community occurred in September 2022, when the price slumped to a two-year low of $1,746 per ton and the speculative net short peaked at 14,052 contracts.

Outright short positions have surged past 2022 levels to a fresh peak of 31,962 contracts, equivalent to almost 800,000 tons of selling.

STOCKS SHOCK

LME stocks of lead stood at a depleted 25,150 metric tons at the start of 2023, equivalent to less than a day’s global usage.

A string of smelter outages over the previous two years had tightened both physical and paper markets, culminating in a sizeable supply deficit of 134,000 tons in 2022, according to the International Lead and Zinc Study Group (ILZSG).

After sliding by 1.7% in 2022, global refined lead production bounced back by 2.8% in 2023, shifting the supply-demand balance back into a 92,000-ton surplus.

LME stocks rose by 109,000 tons last year, closely matching ILZSG’s assessment of the changed market dynamics.

Inventory then fell over the first part of January, a peak demand season for lead due to higher automotive battery failure rates during the northern hemisphere winter months.

Automotive batteries account for around 58% of lead usage, according to Macquarie Bank. Replacement batteries represent 77% of that total, demand peaking during the coldest and hottest months of the year.

Seasonal lead stock patterns, however, didn’t last long.

The arrivals started in the last week of January. A total 88,875 tons of metal were warranted at LME warehouses in Singapore over the ensuing month.

Another 18,000 tons followed at the end of February. And then another 71,000 tons in the middle of March, including a bumper 64,550 tons on March 19.

There were also arrivals in Europe and the South Korean port of Busan.

Deliveries onto LME warrant have totalled almost 210,000 tons so far this year and the headline stocks figure hit an 11-year high of 275,925 tons on Tuesday.

The sheer scale of the deliveries suggest these are partly off-market stocks being drawn into the statistical light of exchange trading by a favourable storage deal.

Zinc has seen similar wholesale inventory movements as stocks financiers arbitrage warehouse costs between high-cost LME storage and lower-cost off-exchange storage.

A WHOLE LOT OF LEAD

That said, it’s still a lot of lead. LME registered stocks now represent almost eight days worth of global usage, up from less than a day just over a year ago.

One driver of the glut is the strength of Chinese exports. The country shipped 188,000 tons of refined metal last year, up 62% on 2022 levels and the highest annual total since 2007.

Some of that metal seems to have headed direct to LME warehouses. The amount of registered Chinese metal in the LME system jumped from zero at the start of 2023 to 51,175 tons at the end of February, by which stage it accounted for 31% of the on-warrant total.

Some of the exports have likely displaced supply in other Asian countries, generating a second wave of deliveries to the market of last resort.

SPREADS COLLAPSE

The deluge of deliveries saw the cash-to-three-months contango CMPB0-3 balloon out to $50.68 per ton on March 20, a level last surpassed in June 1992.

The period has since tightened back to $30 per ton but by lead’s historical standards that’s still a super-contango and a warning sign that there may be more metal on its way to LME sheds.

The three-month price, however, has shown remarkable resilience, dipping sharply in late March but only to confirm support at the $2,000 per ton level.

Investment funds looking for a steeper move on the downside will have been disappointed and some may even already be covering on this week’s recovery bounce.

However, it’s going to take a lot to reverse the negative optics of the LME stocks surge, particularly if it continues over the coming days and weeks.

The big question is just how much more lead is there out there?
Source: Reuters (Editing by Tomasz Janowski)