With signs that China’s economy may be picking up again, I think it’s time to buy some lead. Yes, lead… As everyone knows, lead poisoning can be very harmful, if not fatal, making lead probably the most hated resource over the past 30+ years. After the US banned the use in paints, solders and gasoline in the early 1980’s, prices tumbled and many mines had to close. However, lead still has one very useful purpose – it’s a main component of the SLI lead-acid battery used by cars, trucks, machinery, etc. Let’s take a quick look at the Supply/Demand fundamentals.
Supply
Annual supply comes from two sources – new mining production and recycled scraps. Production in Australia and the US, the #2 and #3 producers, has declined for the past ten years. Many mines are now being closed because of exhausted resources. An average ton of ore now contains about 2% lead, compared to 3% ten years ago. Xstrata and BHP, two of the world’s largest producers, have closed mines in Canada and Australia in the past two years alone and the availability of scraps for recycling has been slowing – expected to decrease 2.9% this year. The bulk of global production growth these days is coming from China – the world’s largest producer and consumer. We’re also seeing production increases in India, Russia and Mexico, but it will be years before expansion plans are complete (it takes a long time to open mines). Meanwhile, mines and smelters in most developed nations are facing tougher environmental restrictions each year.
Demand
Lead-acid batteries account for 85% of total lead demand. Demand for industrial batteries, which contain 80 to 140 pounds of lead per battery, is expected to increase 10% next year. Growth is being driven primarily by mobile phone towers which use batteries as back-up power sources. 4G wireless networks are now being rolled out across Europe, Africa and the Middle East. Businessweek estimates this will require 8.5 million new industrial batteries in this region alone.
The bulk of remaining demand is for automotive batteries. The global auto industry has been showing signs of strength again but China is the key here. The number of cars produced in China has more than doubled since 2008, which is why the country now accounts for 45% of global lead consumption, and is expected to increase another 50% by 2020.
While global supplies have been increasing slightly, it’s looking like producers are having trouble keeping pace with rising demand. After surpluses of 156,000 tons in 2011 and 13,000 tons in 2012, industry reports now estimate a shortage of 154,000 tons in 2013.
Summary
If China’s economy is beginning to pick up again, we’ll see demand outpace supply. This means higher prices. I think investing in lead directly is a much simpler way to capitalize than having to worry about the issues that miners and battery producers face. It’s also a great way to invest in the mobile revolution which I don’t expect to slow anytime soon.
Thanks for following!
Nick
