Macquarie Research: Lead market solid, supporting price

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Commodities Comment
Lead market solid, supporting price
 Lead is the only LME metal to be trading at a higher price today than at the
start of the month. Lead gave up less ground in the recent sell-off but has still
bounced strongly in the latest rally. Are there any good reasons for this? The
latest demand indicators and physical market price signals (premiums, scrap
prices and treatment charges) are positive. LME stocks are high but Chinese
data suggest de-stocking in the world‟s largest market and total reported stocks
are not very high. In the medium term the potential for demand growth is clear
but there are supply side challenges. Overall the lead market looks solid to us.

Latest news
 Major LME metals prices all rose with some short covering in trading on
Thursday. Nickel (+3.9%) and copper (+3.3%) saw the strongest gains but
zinc lagged (+2.1%). Precious metals prices were mixed with gold broadly flat
on the day at $1,404/t.oz but silver and PGMs metals prices all falling.
 The past couple of days have seen a decent pick up in both the SGX iron ore
swaps market alongside a pick up in enquiries in the physical space. Swaps for
Q2 2011 have risen almost $10/t over the past two days to $155/t CFR China
(62% Fe), but the curve remains heavily backwardated. We expect sentiment
in the Chinese steel sector to improve incrementally as the credit squeeze is
eased, and while steel prices may show some upward momentum, we still
expect physical iron ore to continue edging down over the next couple of
weeks as mills rebuild confidence in forward margins, before rebounding
given still strong steel production.
 After the surge of the past three days, thermal coal prices corrected severely on
Thursday, joining the power and gas market price pullback. Prompt months
fell between $3.8-$6.5/t, after reports three of Japan's thermal power facilities
(representing ~8mt of import tonnage) could be offline for a significant period.
We would reiterate that Japanese demand for 2011 as a whole would be
down on 2010 imports, but this still leaves the overall market in deficit,
particularly with almost 2mt of potential additional consumption in Germany
for every three months the 7GW of nuclear capacity under review is offline.
 The latest World Steel Dynamics SteelBenchmarker assessment highlights
the recent divergence in global steel pricing. While US domestic hot rolled coil
(HRC) rose $26/t over the past two weeks, the world export price was flat and
Chinese domestic HRC price was down $21/t. Since the start of November
2010, the US price has risen by $357/t (59%) but the Chinese price by only
$41/t (7%), taking the arbitrage between these prices to a 27-month high.
 Reviewing all of the news in the uranium market, almost regardless of what
happens at Fukushima over the coming week, we expect China will continue
importing large tonnages of uranium from Kazakhstan through 2011 and
perhaps into 2012. This will tighten the world market ex-China, and
depending on how much China imports, could still leave the world ex-China in
deficit in 2011.
 However, in the short term, further incrementally bearish news flow will
depress the market, with the most recent example being the EU's energy chief
Guenther Oettinger saying that he expects upcoming stress tests of Europe's
143 reactors (~140GW; 38% of global nuclear capacity) “will show that not all of
them meet the highest safety norms”. In the short term we don‟t think uranium
looks „cheap‟ until it trades in low $40s/lb (~15-20% below current levels).