By Marie-Louise Gumuchian
LONDON (Reuters) - Supply constraints and solid demand will push lead prices higher despite prospects a current crackdown on polluting battery-makers in top consumer China will hit consumption there in the short term.
With a major mine in Australia shut indefinitely and alternatives to the lead-acid battery far off, analysts see prices ranging from $2,700 to $3,000 a tonne in the fourth quarter, above current levels.
Three-month lead on the London Metal Exchange (LME) traded around $2,475 at around 1200 GMT on Monday from $2,432 at Friday's close.
Lead demand is less vulnerable to economic cycles than that for most other base metals. About 40 to 50 percent is used in replacement batteries, which are subject to the vagaries of weather rather than economic conditions.
"Lead was resilient during the financial crisis...and that's going to continue and hopefully be reinforced by a general pick up in new batteries for new cars and vehicles," Credit Agricole analyst Robin Bhar said.
"Most of the demand is for lead-acid batteries and as yet there's no cheap alternative...so you can't do without lead."
Lead hit a three-year high of $2,904 a tonne in mid-April before tumbling 20 percent weeks later as expectation of a jump in emergency battery generator demand in Japan, following the March earthquake there, was offset by falling automobile output.
Stocks at LME warehouses are at 16-year highs of more than 323,000 tonnes, but not readily available. A dominant position controls more than 90 percent of stock warrants and cash contracts.
The International Lead and Zinc Study Group in April increased its forecast for surplus global refined lead production for 2011 to 123,000 tonnes from its last view of around 90,000.
On the supply side, Canadian miner Ivernia Inc said in April it was placing its flagship Magellan lead mine in Australia under full care and maintenance for an indefinite period.
Barclays Capital analyst Gayle Berry was positive toward lead in the second half of this year, saying a seasonal lull in demand and big builds in LME inventories were temporary.
"We have prices averaging $3000/T in Q4," she said.
"This is a market that doesn't really have any inventory buffer when things do begin to improve, so we suspect that as that concentrate is missed from Magellan and as you get that seasonal pickup in demand, we think that the inventory draws will support a pretty decent move up in prices."
More than 300 lead-acid battery plants in China's eastern Zhejiang province and southern Guangdong province were closed in May for safety checks, cutting lead demand in the short term.
In the longer term, the closure should not cut China's lead demand sharply as it is unlikely to extend for the rest of 2011, industry sources in the country said. Battery production accounts for about 70 percent of domestic lead consumption.
"This certainly will have an impact on lead consumption this year," a sales manager at a large lead producer in China said.
However he said demand from big lead-acid battery plants was unchanged, as it was smaller plants that were being targeted. "Big producers usually have good environmental protection facilities," he said.
Hu Yongda, analyst at state-backed research firm Antaike, expects 2011 consumption not to be less than 4.1 million tonnes.
"If there is a cut in demand, the trimmed amount won't exceed 100,000 tonnes," he said, keeping a 2011 consumption estimate of 4.19 million tonnes versus about 3.7 million tonnes in 2010.
He said large battery factories would raise production, which could offset smaller factories' lower output. New battery factories had also started production in western China.
"This (crackdown)...is depressing lead buying by battery manufacturers worried that their production may be subject to suspension," Macquarie said. "This is bearish for physical lead demand in the short term, and also for premiums and prices."
But end demand for lead still looked solid, it said in a note, with North American lead-acid battery shipments running at record levels in recent months.
China also plans to phase out battery-powered e-bikes that exceed speed and weight limits published 12 years ago, a move that could also cut demand.
"New rules governing the use of e-bikes and motorcycles and softer auto output growth may be potential headwinds," ANZ said in a note. It did not think the Chinese crackdown on lead-acid battery manufacturers would impact the 30 larger manufacturers, accounting for about 60 percent of total battery output.
China's auto market is expected to grow slower this year after two years of breakneck expansion. The U.S. auto industry snapped a four-year sales decline in 2010. Most analysts expect double-digit growth in 2011 and more gains in 2012.
MF Global analyst Edward Meir said he thought lead prices had peaked for 2011 but saw them ranging $2,300-$3,000 in 2012.
"Probably a revival in car sales (will help boost prices)," he said, adding that growth in the hybrid vehicle sector would also be supportive for lead prices.
"Secondly, we're seeing a clear trend toward all these hybrid technologies and lead is going to be a factor because most of these new technologies rely on a battery component."
(Additional reporting by Polly Yam in Hong Kong, editing by Anthony Barker)