Testing times for lead

Testing times for lead Neil Hawkes - CRU 13th Asian Battery Conference, Macau, China (1-4 September 2009)

What goes up… $ per tonne – LME 3-months lead price (daily) $1,000 level

…came crashing back down… $ per tonne – LME 3-months lead price (daily) $1,000 level

…but regaining some lost ground this year $ per tonne – LME 3-months lead price (daily) $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

Strong global lead demand growth in mid-2000s… ‘000t lead consumption – annual total (global) ‘000t lead – yr-on-yr chg Annual - LHS Trendline growth Yr-on-yr change - RHS

…slower growth in 2007-2008 ‘000t lead consumption – annual total (global) ‘000t lead – yr-on-yr chg Annual - LHS Trendline growth Yr-on-yr change - RHS

Much weaker demand performance once China is separated ‘000t lead consumption – year-on-year change China Rest of the world

Global refined lead output growing at quicker pace… ‘000t lead – yr-on-yr chg ‘000t lead production – annual total (global) Annual - LHS Trendline growth Yr-on-yr change - RHS

…with RoW rejoining China on upward path ‘000t lead production – year-on-year change China Rest of the world (RoW)

Market moved back into surplus in 2008… ‘000 tonnes of refined lead …turns to surplus in 2008 Record deficit in 2004…

Collapse in lead prices 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

Lead’s star performance crashes back to earth LME 3-months prices, index to 1 August 2003* = 100 Lead Nickel Zinc Copper Tin Aluminium * Approximate starting point of LME metals price rally

Collapse in lead prices 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

Lead and copper vie for best performers on LME this year LME 3-months prices, index to 2 January 2009 = 100 Copper Lead Zinc Tin Aluminium Nickel

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 ?

Batteries account for over three-quarters of global lead demand * 2005 estimates 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 Data:CRU report – ‘What is the future for lead consumption? (2007)’

And Chinese demand has continued to grow this year… ‘000t lead consumption – year-on-year change

…but the rest of the world continues to fall away… ‘000t lead consumption – year-on-year change China Rest of the world

…leaving global demand falling for the first time since 2001 ‘000t lead consumption – annual total (global) ‘000t lead – yr-on-yr chg Annual - LHS Trendline growth Yr-on-yr change - RHS

Mounting list of primary smelter cuts

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

So, Western primary plummet and secondary slip this year… ‘000t lead production – year-on-year change

…China still growing, but bigger drop in RoW… ‘000t lead production – year-on-year change China Rest of the world

…leaving global lead output falling for first time since 2001 ‘000t lead – yr-on-yr chg ‘000t lead production – annual total (global) Annual - LHS Trendline growth Yr-on-yr change - RHS

Chinese switch from exporter to importer driven by wider Chinese price premium over LME ‘000 tonnes refined lead $/t Chinese net trade in refined lead (LHS) Net exports Net imports Chinese lead price premium over LME lead cash price (RHS)

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

Market surplus shrinking in 2009, mainly in West ‘000 tonnes of refined lead 2009

LME stocks climb in 2009 $ per tonne – monthly average ‘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: • Cost of producing lead is higher • Stronger demand growth, driven by China • Primary lead struggle to fill ‘gap’ • 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 ? $ per tonne – LME cash lead price (annual average )

Thank you for listening Neil Hawkes, Lead market analyst - CRU Tel no. +44 20 7903 2101 Email. neil.hawkes@crugroup.com

Testing times for lead