LONDON Fundamentals still have a strong role to play in setting physical premiums in the lead market, according to Eric Le Roux, director for metals markets at Société Générale SA.
Premiums have rallied in the United States and Europe this past year.
Some U.S. contract premiums have been set at $220 to $230 per tonne for this year, a response to the sharp rise in spot premiums seen throughout 2012, Le Roux told delegates recently at the 5th World Lead Conference in Istanbul.
The run-up came in response to tighter scrap supply and a drawdown in refined lead inventories. The lead stocks-to-consumption ratio fell from 10 weeks supply to four weeks during 2012 as spot premiums rose to nearly 12 cents per pound from 6 cents, Société Générale research shows.
"From the example of the United States, it is clear that the premium is linked to the availability of lead," Le Roux said. "As the availability of lead is decreasing, people will have to pay a better premium for immediate access to it."
Warehouses and stock financiers have played a role in setting market premiums, but while their effect has been pronounced in the aluminum market fundamental supply and demand conditions will continue to drive lead premiums, he said.
"If we go to an extreme point, the risk would be for the market to be driven mostly by actors who arent going to use the metals. The premiums would be really hightoo high for consumers to actually buy it. The market would be transformed and would forget its primary purpose," Le Roux said. "Nevertheless, this case is really an extreme one because as we saw in lead, the weight of fundamentals is way too important not to have an impact on prices."
Nevertheless, high lead premiums in the United States and Europe are becoming a concern for clients of the Paris-based bank, he said.
Contract premiums for 2013 have been set between 100 to 170 ($129 to $219) per tonne in Europe, depending on grades, sources told AMM sister publication Metal Bulletin late last year.
A version of this article was first published by AMM sister publication Metal Bulletin.