(MENAFN- Gulf Times) The lead market is on a tear. The least sexy of the industrial metals traded on the London Metal Exchange (LME) has surged by over 20% from its March lows to a current $2,040 per tonne.
It is now showing year-to-date gains of almost 9%, making it by some margin the best performer of the core LME metals so far this year. Few would have predicted such stellar price action, or indeed much action at all, given lead's moribund range-trading over the course of much of 2013 and 2014.
But then few were expecting someone to cancel over 40% of LME stocks, a metal grab that has transformed the LME lead landscape. The impact on spreads and positioning is still evolving, not least because of follow-on hits on LME inventory such as this morning's fresh 15,500 tonnes of cancellations at Johor in Malaysia.
The question, though, is whether all this turmoil on the LME says anything meaningful about the lead market's underlying dynamics. Lead was kicked into life by the 98,350 tonnes of cancellations reported on the morning of Monday, March 23.
They represented 41% of all warranted stocks in the LME system with just about every location being hit.
Some of that metal is now leaving with Dutch and Malaysian locations seeing daily draws. A total 37,700 tonnes have departed in the intervening three weeks.
On their way to South Korea, if you believe the word on the LME "Street", which came to a consensus view on what was going on in unusually quick time.
But then the supposed raid by a warehousing company on its peers with the help of a physical merchant has ruffled a lot of feathers in the small world of LME lead trading. There has been no shortage of disgruntled finger-pointing.
It's not the first time this has happened in the lead market.
A similar outbreak of warehouse warfare took place in 2012 with southern European locations stripped of around 60,000 tonnes of lead only for a suspiciously similar amount of metal to reappear in Antwerp a few months later.
That European lead heist, though, is overshadowed by this year's global lead grab. Moreover, it seems to have triggered a second wave of cancellations, possibly defensive in nature as everyone else tries to grab a piece of a rapidly diminishing pie. Cancelled tonnage across the LME warehouse system now totals 101,975 tonnes, almost half of all registered stocks.
The March lead stocks raid caught out funds that had been steadily accumulating short positions over the previous six-month downtrend.
Money managers' positioning on the London lead contract had shifted from a net long equivalent to 14% of open interest at the start of September 2014 to a net 4% short by the start of March.
Some short-covering was evident in the early part of March but money managers were still marginally net short when the mass cancellations showed up in the LME's daily stocks report on March 23.
Since then there has been a near 230,000-tonne addition of net long positioning, most of it due to a reduction in shorts. A word of warning. These figures from the LME's Commitments of Traders Report may well understate the scale of the bear retreat, given the continued question-marks as to how exactly players are categorised.
What's not in doubt is that the cancellations triggered an acceleration of short-covering, creating a vicious circle for bears of rising outright prices and tightening spreads. The benchmark cash-to-three-month period flared out to $12.50 backwardation at the end of March, the widest it's been since late 2012.
As for the outright three-month price, it has now recouped most of the losses racked up over the fourth quarter of last year and the first two months of 2015.
Fund short-covering is currently feeding on itself as momentum indicators accelerate and chart resistance levels fall like dominoes. Yet once the short-covering dust has settled, what then?
It's always difficult to see beneath the surface in the lead market. It has a particularly elevated scrap component and such "secondary" markets are notoriously opaque. On the surface, at least though, nothing very much appears to have changed.
The latest figures from the International Lead and Zinc Study Group suggest supply and demand are largely balanced, just as they have been for some time.
The global refined lead market notched up a small 23,000 tonne surplus last year and a 3,000-tonne surplus in the first two months of this year.
China, once the great hope for the lead market thanks to the e-bike phenomenon, has been a marginal net exporter of refined metal since 2013, suggesting it too is at the very least balanced.
Bulls would love to believe all that cancelled LME lead is going to meet physical demand but there's very little evidence to support such a view.
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