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COLUMN-Lead's resilience a mix of the good, the bad and the ugly: Andy Home

(Repeats with no changes. The opinions expressed here are those of the author, a columnist for Reuters)

By Andy Home

LONDON, Jan 19 (Reuters) - Let's face it, lead is not exactly the sexiest of metals. It (Other OTC: ITGL - news) 's never caught the collective investment imagination in the way that copper has over the years.

Indeed, the only interaction that most of us have with the stuff is in the form of an automotive battery and even then only when the battery fails.

But it's that very dullness that helped make lead the most resilient of the base metals markets last year. It fell by less than five percent, compared with copper's 25 percent plunge and nickel's 40 percent implosion.

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And that relative outperformance has continued amid the general carnage of the first part of January.

There are good reasons for this. But there are also some bad and downright ugly reasons in the mix as well.

Because "boring" lead is something of a battlefield right now with volatile spreads and a long-running war between operators of London Metal Exchange (LME) warehouses.

THE GOOD

Lead's overwhelming usage in just one application, batteries, provides insulation from the macroeconomic storms currently buffeting the other metals.

Automotive batteries fail in good times and bad and most often during winter, which in the world of lead is called the battery-kill season.

Replacement battery demand is the core driver of lead usage and the only boom-bust cycle that counts is when your car doesn't start.

The second component of battery demand is new automotive production, estimated to account for around 15-20 percent of the total battery market.

And automotive output remains one of the few bright spots in a darkening global manufacturing picture.

True, the sector has struggled in emerging markets such as Brazil and Russia but vehicle output in the EU rose by nine percent and that in the U.S (Other OTC: UBGXF - news) . by six percent last year, according to analysts at Macquarie Bank. ("Commodities Comment: Global Car Sales", Jan. 13, 2016).

In China, meanwhile, a government tax cut in October fuelled a sharp 16-percent rise in production over the fourth quarter of the year.

Global sales in December were a "clear all-time record" on a seasonally-adjusted basis, according to Macquarie, which is looking for a further "moderate acceleration of car sales growth" this year.

That should at the very least keep lead demand ticking over in the coming period, immunized from the broader economic trends roiling the other metal markets.

THE BAD

A less rosy reason for lead's resilience has been the volatility in spreads on the London Metal Exchange (LME).

The benchmark cash-to-three-months spread flared into backwardation in the first, second and fourth quarters of 2015.

And it has tightened again this month, closing Monday valued at $5.25 per tonne backwardation.

Indeed, there is something of a showdown in the cash market this week with the LME's prime January prompt date in the process of being settled.

The positioning landscape at the start of the week showed four big longs facing off against six big shorts. The resulting tension has caused the "tom-next" spread , which on Tuesday is the cost of borrowing metal between Wednesday and Thursday, to trade at $2 backwardation on Tuesday morning.

Such bouts of spread volatility have tended to deter the sort of aggressive short-selling that has characterised markets such as nickel. Instead, they have attracted on the bid side those algo traders who factor spreads and stocks into their trading programmes.

Moreover, with one party still holding 30-40 percent of all LME stocks of lead and more big potential long-short clashes looming in the coming months , there is no guarantee that things are going to change significantly once the LME's third-Wednesday January prompt date passes.

*****************************************************

Graphic on LME lead stocks and spreads:

http://tmsnrt.rs/1nhTWTT

Graphic on LME lead warehousing war:

http://tmsnrt.rs/1Ng9xrt

*****************************************************

THE UGLY

Ah yes. Stocks.

As of today's LME stocks report, there are 188,225 tonnes of lead sitting in exchange warehouses.

That sounds like a lot until you factor in the amount of metal that has been cancelled in readiness for physical load-out. Over half of all the stocks are in this category, meaning that the amount of stocks available for physical settlement is just 92,875 tonnes.

Sadly, all the evidence suggests that such a large load-out component has absolutely nothing to do with the physical lead market but is rather the latest manifestation of a long-running battle for storage rights between LME warehouse operators.

This warehouse war started in March last year when someone cancelled 98,000 tonnes of LME lead stocks, or around 40 percent of the total amount of lead in the exchange warehousing system.

Most of that was subsequently physically loaded out ... only to reappear again over the following months.

As market rumour had foretold, the two main recipients were Worldwide Warehouse Solutions (WWS), the logistics arm of Noble Group, and Metro (Other OTC: MTRAF - news) , the LME warehousing franchise now owned by metals-property magnates, the Reuben Brothers.

WWS took in 36,500 tonnes of metal at its sheds in Vlissingen in June and Metro just over 50,000 tonnes at the South Korean port of Busan in July.

Of the latter 33,000 tonnes were immediately cancelled again and the LME's monthly reports on stocks by warehouse operator showed Metro losing that amount of metal over the months of August, September and October.

Come December and, coincidentally or not, some 31,250 tonnes of lead were warranted, or maybe that should read "re-warranted" in Busan, but this time in the sheds of Pacorini, the warehousing arm of Glencore (Xetra: A1JAGV - news) .

December also saw more big cancellations at Busan, Vlissingen and Malaysia's Port Klang.

More of the same or a revenge attack? The LME's monthly operator stocks reports don't make it easy to read who is raiding whom until the metal is either loaded out or loaded in.

But all the evidence suggests that the tit-for-tat stocks raids are continuing.

ANOTHER YEAR OF OUT-PERFORMANCE?

Of course, all this adds to the sense of unpredictability in the lead market.

Who wants to short a metal in which it has become commonplace for half the available stocks to disappear and reappear at irregular intervals?

And as the stocks merry-go-round continues, spreads are as likely as not going to be remain volatile. On the LME, it's not the total amount of stocks that count, it's the amount of non-cancelled stocks that represent the real liquidity base.

Somewhere hidden beneath all this are the solid reasons for lead to continue outperforming its base metals peers.

But in this market fundamentals are being distorted by warehousing shenanigans and their impact on front-month spreads.

It's this unholy mix of the good, the bad and the ugly that is helping lead withstand the gravitational downwards pull of the rest of the metals complex.

Not such a dull market after all it seems. (Editing by David Evans)