China’s exports of refined lead feed LME stocks rebuild

The acceleration in outbound flows has been triggered by a persistent cash premium on the London Metal Exchange (LME) lead contract which has widened the export arbitrage window.

Some of the metal leaving China appears to be making its way directly to LME warehouses in the region. LME stocks of the heavy metal have been rising steadily since the start of September and on Friday hit their highest level since January 2021.

However, the transfer of surplus metal from east to west is preventing a rebuild of stocks in Shanghai, where the lead market is also still gripped by tightness.

Exports accelerate
China exported 35,400 metric tons of refined lead in September, which was the highest monthly tally since June of last year.

Total shipments in the first nine months of 2023 rose by 49% year-on-year to 138,000 metric tons, already higher than the 116,000 shipped out over the course of calendar 2022 and on track to be the highest tally since 2007.

China has been a consistent net exporter of refined lead since the middle of 2021, the incentive originally coming in the form of record high physical premiums in a disrupted Western supply chain.

Much of that physical tightness has since abated, particularly in Europe where the Stolberg smelter in Germany restarted in April after two years of flood repairs.

The current export incentive is now the cash premium on the LME.

The top two destinations for Chinese lead last month were Taiwan and South Korea to the tune of 16,400 and 12,800 metric tons respectively.

Both countries host LME-registered warehouses.

LME stocks rebuild
The relocation of stocks from China to the West has seen LME stocks rebuild from their depleted year-start levels.

Headline stocks of 125,225 metric tons are up by 100,075 metric tons on January and are the highest they’ve been in almost three years.

Almost all of what’s in the LME storage system is warranted metal. Cancelled stocks awaiting physical load-out stand at just 1,375 metric tons.

Over half of LME stocks were either Chinese or Taiwanese metal at the end of last month, compared with under a third at the start of the year.

The LME stocks rebuild has been driven by repeated bouts of tightness across the front part of the forward curve in recent months.

The cash premium over three-month metal flexed out to $64 per metric ton on Monday, matching the levels seen in the last squeeze in September but short of the $100.50 traded in June.

The cost of rolling a short position overnight, the LME’s “tom-next” spread, traded as wide as $10 per metric ton on both Monday and Tuesday, attesting to the pressure on the cash date.

The structure has since eased but only marginally. The cash-to-three-months premium was valued at a still elevated $38.50 per metric ton at Thursday’s close.

Two entities controlled at least 80% of LME stocks as of the Wednesday close, according to the latest exchange positioning report .

Clearly there is something of a long-short battle playing out in the London lead market, where the outright price has been under pressure.

After hitting an 8-month high of $2,301 per metric ton at the start of September, three-month lead slumped to a four-month low of $2,029 in the middle of this month. It has since stabilized, last trading around $2,110.

Double squeeze
There is now twice as much lead sitting in the LME warehouse system as in Shanghai Futures Exchange (ShFE) warehouses.

ShFE stocks have slid from almost 80,000 metric tons in the middle of September to a current 64,329 thanks in large part to the flow of metal out of the country.

Stubbornly low stocks have exacerbated a running squeeze on the Shanghai lead contract.

Things have calmed a bit since early September, when a ferocious short squeeze propelled the Shanghai price to a four-year high. But the front part of the forward curve remains heavily backwardated through the March 2024 contract.

Open interest of 137,850 contracts has fallen from the September peaks above 210,000 contracts but remains significantly higher than levels seen in the first half of this year.

The global lead market is currently a tale of two squeezes.

China’s exports will help mitigate the tightness in the London market but at the risk of another flare-out in the Shanghai market.