Seasonal battery demand, tight supply to buoy lead prices

By Pratima Desai

LONDON (Reuters) - Seasonally strong demand from battery makers, tight supplies caused by mine shutdowns and dwindling inventories in London Metal Exchange warehouses are expected to sustain lead prices, which recently hit six-year highs.

Benchmark lead on the London Metal Exchange at around $2,500 a tonne is up about 25 percent so far in 2017. Much of that gain came in the second half of this year as the prospect of a large deficit came into view.

"Winter in the Northern Hemisphere is 'battery kill' season for automotive replacements. Car battery manufacturers start preparing stocks in September," said Farid Ahmed, lead analyst at consultants Wood Mackenzie.

More than 80 percent of global lead consumption -- at around 11 million tonnes this year -- goes towards batteries mainly for autos, demand for which has risen sharply in countries such as China due to growing affluence.

"The supply crunch has been looming for a couple of years," Ahmed said, adding that he expects the lead market to see a deficit of 131,000 tonnes this year and 105,000 tonnes in 2018.

Lead is mined alongside zinc. Closures of major mines such as Century in Australia and Lisheen in Ireland and cutbacks by miners such as Glencore have left the market short of both metals.

Between 2014 and 2016 mined lead supply shrank by roughly 500,000 tonnes, or 10 percent of the global total, analysts say.

Additionally, an expectation that lead usage will plummet due to stronger demand for electric vehicles, which use lithium-ion rather than lead-acid batteries is premature.

"We see the market share of EVs rising as battery costs fall and charging infrastructure improves, but this is going to be a gradual process, with the major impact on lead arriving post-2020," ICBC Standard Bank analysts said in a note.

"Furthermore, while hybrids continue to play a significant role, there will still be demand for lead-acid batteries."

The biggest supply shortfall over coming months is seen in top consumer China due to an environmental crackdown on polluting industries.

Additionally, China's imports of lead concentrate from North Korea have tumbled due to new sanctions imposed on Pyongyang by the United Nations as punishment for missile tests in July.

Shortages of concentrate have seen treatment charges -- the fees that smelters charge to turn ore into metal -- plunge.

"Supply constraints are pretty visible," said Societe Generale analyst Robin Bhar. "If you are looking for a seasonal play, lead would be number one, maybe getting a demand boost from a colder winter than people expected."

The LME's positioning report shows funds' net long positioning hit 24,557 lots or more than 600,000 tonnes on December 1, its highest since the exchange started publishing the data.

Also a concern for consumers are dwindling stocks in LME registered warehouses, which at 145,500 tonnes are down from above 190,000 tonnes in March. Nervousness is reinforced by cancelled warrants or material earmarked for delivery at above 30 percent of the total.

Graphic - LME lead vs North Korea's exports of lead concentrate to China: http://reut.rs/2AsA5ft

Graphic - Lead concentrate treatment charges in China: http://reut.rs/2AvRfZu

Graphic - LME stocks -- total vs cancelled warrants: http://reut.rs/2js0bbb

Graphic - Funds' net long lead position on LME: http://reut.rs/2jscIeN

Graphic - LME lead prices vs China passenger car sales:

http://reut.rs/2AtibJD

Graphic - China lead output: http://reut.rs/2AtOVm7

(Reporting by Pratima Desai; Editing by Gareth Jones)