Barclays: Lead takes the lead as all metals strengthen on Chinese data

All the metals closed higher yesterday and have continued to firm this morning. Lead has been particularly strong with prices hitting $2,770/t, the highest since April. Today’s price rise has been largely China-driven with stronger-than-expected economic data and, particularly important for metals fundamentals, the strong growth in industrial production (up 15.1% y/y versus the market’s expectation of 13.1%).

The NBS has released production data for June and the picture is one of strong growth. Copper and Aluminium production reached record highs, while nickel, lead and Zinc production all grew at a fast pace. Refined copper production rose to a monthly record of 477Kt in June, up 12% y/y and 8.7% m/m and concentrate production also reached a record high of 4.1Kt/d in June, up 24% y/y and 12.7% m/m. A combination of strong domestic refined production together with continued drawdowns in bonded warehouse stocks illustrates the strength of domestic demand, which is further evidenced by 18% y/y growth in semis output to a record high of 1.05Mt.

Primary aluminium production has once again reached a record high of 1.59Mt (53Kt/d) in June, up 13.3% y/y and 3.58% m/m. This is the seventh consecutive month of m/m production increases and the latest record high output indicates that aluminium smelters have continued to ramp up production both after the power cuts at the end of last year and from new capacity. Such strong production, coupled with (i) persistent draws on SHFE aluminium stocks (down 202Kt and 46% YTD); (ii) physical premiums re-emerging; and (iii) the entire SHFE curve (out to early 2012) in a backwardation, reflects strong demand and this has been confirmed with June's aluminium semis production at a record high of 2.53Mt (84.5Kt/d), marking a 35.4% y/y and 3.64% m/m growth. While the strength in Aluminium semis production in recent months may be partly driven by a rush to produce and export aluminium semis ahead of expected reduction in export tax rebates, unless the detailed breakdown of June's export data into primary aluminium and aluminium alloys indicates a spike in semis export, it would appear that domestic consumption is the main driving force.

Refined Lead and Zinc production both rose in June to 446Kt (20.9% y/y, 29.3% m/m) and 458Kt (11.7% y/y, 9.3% m/m) respectively in June. This growth in output for these metals, together with the rise in SHFE stocks suggest that the domestic market is currently well supplied. However, there is growing evidence to suggest there is pent up lead-acid battery demand for when battery manufacturing plants re-open, which should support lead consumption.

However, in the case of zinc, although galvanised Steel production continues to grow y/y this is being outpaced by zinc supply. Refined Nickel production has once again showed robust growth amongst all the base metals, up 48.2% y/y and 19.9% m/m, while Tin was the outlier of the metals. It was the only metal for which output declined, by 6.7% y/y and 0.41% m/m. Finally, in other supply news, workers at Freeport-McMoRan’s 510Ktpy Grasberg Copper mine in Indonesia have returned to work after an 8-day strike (Reuters), which we estimate resulted in a loss of almost 11Kt.

Meanwhile, in Chile, following a 24-hour company wide strike on Monday unions have threatened more protests if Codelco does not include them in talks when it undertakes reforms, including job cuts. The sub-contractors have given Codelco an ultimatum to open negotiations over benefits or face protests (Reuters). Should a tough stance be taken with the unions, we believe there is heightened risk of further disruptions going forward.