Many industrial metals saw prices surge in 2009 as the global economy recovered, the dollar weakened, and inflation concerns were . However, beginning in early 2010, the markets experienced a reversal, as the core CPI fell for the first time in more than 25 years and the dollar gained on global sovereign debt concerns. These factors have caused major weakness in many commodities, especially in base metals ETFs such as PowerShares DB Base Metals Fund (DBB), which is down almost 3.6% this year compared to a gain of nearly 70% over the past 52 weeks. One of the weakest components in the base metal category is lead, which is accessible to investors through iPath Dow Jones-AIG Lead Total Return Sub-Index ETN (LD). The ETN was down 2.8% in trading on Monday and is down more than 11% in 2010, by far the worst performer in the Metals ETFdb Category. While the weakness in the metal can be linked to a variety of reasons, we have highlighted five issues below that are contributing to lead’s recent slump:
1. Stronger Dollar
With continued fears regarding the health of the euro zone on the minds on investors, the dollar has been on a rally recently, boosting the greenback and sending the prices of metals lower across the board. LD has not been immune to the dollar’s rise, as speculative money has fled the metals markets for the stronger dollar.
2. Decreased Usage
The toxicity of lead is well known, especially after the recent Chinese lead paint toy fiasco. Due to this and other health concerns, most manufacturers are taking steps to phase out the metal’s usage in many applications, specifically in paint, electric circuits and auxiliary car uses. This has resulted in a decreased demand for the metal, putting downward pressure on prices. However, lead remains a low cost alternative to other similar metals, one factor that is helping to keep demand up in poorer emerging countries.
3. High Recycling Rate
With a recycling rate of 97%, lead is one of the most recycled metals in the world, ensuring that a constant supply is available for end-users. The ease of recycling helps to cap prices; when prices are rising consumers are able to easily able to bring in scrap lead and convert it into cash. By comparison, copper is recycled at about an 80% rate and zinc stands at about 40% (PDF).
4. More Mining Means More Lead
Lead is frequently found naturally with silver, zinc, and copper. Increased demand for these metals has spurred increases in mining activity, which has in turn led to increased supplies of lead. Pure metallic lead is very rare in nature and the vast majority of this resource is found with other base metals, suggesting that if more mines are opened lead supply is bound to increase as well.
5. Chinese Demand
Chinese demand could decrease due to monetary tightening policies, which threaten to slow down a Chinese economy that some believe is overheating. Furthermore, a recent crackdown on heavy polluters and a new tax on lead imports and exports has forced the Chinese market to become more self-sufficient, only buying or selling the metal outside of the country if completely necessary. This has helped to keep the global supply and demand equation in relative balance as the Chinese market is further segregated from the rest of the world lead market.
Despite the recent weakness, some are bullish on the metal in the medium-term due in large part to its widespread use in the battery industry. As more consumers use cars in emerging markets it could help to buoy the price of lead and keep it from sinking further. Batteries currently make up 80% of the lead usage so as the battery industry goes so inevitably will go lead.
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Disclosure: no positions at time of writing.