Lead, usually one of the quietest of the base metals, is now one of the most publicized in the complex. With a price well above $3,000/mt, seemingly insatiable demand from China, and falling stock levels, Platts Edward Pearcey looks at what the future holds for this versatile commodity."
Lead is like Molybdenum in that the majority of mine production is as a byproduct of other metals. Lead is typically a byproduct of silver or zinc mines and Molybdenum is a byproduct of copper mines. In fact, the fraction of lead mined as a byproduct is significantly higher than the fraction (60%) of moly mined as a byproduct.
The supply of metals which are primarily produced as byproducts is very inelastic, that is, an increase in metal price does little to increase supply as the supply is driven by the demand for the primary metals. This means that the price of these byproduct metals is very volatile as the supply changes with the supply of the primary metals. The supply does not change as a result of changes in demand for the byproduct.
Now, lead is particularly interesting in that it is basically used for only one thing: lead/acid batteries. These batteries are used primarily in automobiles although they are increasingly used to power electric bicycles.
The price of a battery is a small contributor to the price of an automobile. Electric bicycles are significantly cheaper than their primary substitute, the motor scooter. Together this means that the demand for lead is also inelastic.
The basics of microeconomics inform us that when an inelastic supply curve meets an inelastic demand curve where the overall demand is increasing one can expect a volatile, rapidly rising price. That is what has been happening with lead (see the above graph).
This means that we can expect lead prices to stay high (and even rise rapidly) as long as the world-wide production of automobiles continues to increase faster than the worldwide production of lead primary metals (zinc and silver). The above price curve indicates that this has been the case for about a year and a half.
Because both curves are inelastic the price can be extremely volatile and there is no telling how high lead might go or how suddenly the price may collapse should the supply growth (driven by primary metal product mining increases) exceed demand growth.
If one is invested mining companies that produce lead as a byproduct (I'm in TAM.V, BN.V and ADA.V) one should be prepared for extreme volatility. The ride should be really something if demand continues to increase faster than supply as has been the trend. One should also be keeping an eye on auto sales and electric bicycle sales in China as this is where the primary demand growth is taking place.