Lead Prices at London Metal Exchange (LME)
http://www.lme.com/lead_graphs.asp
http://www.metalprices.com/FreeSite/metals/pb/pb.asp
)- Lead prices are at highest level in last few months. After the crash of 2008-09 the price has recovered andareat fresh highs since October 2008.
)- Last 10 year high was achieved in October 2007, dropped sharply by end of January 2008 but then again went up sharply in first half of 2008 to drop again in second half of 2008. From peak of Oct 2007 to trough of Nov 2008 it lost 60-70 % of its value. Since first half of 2009 it has recovered nicely but is still far away from its peak of 2007.
Lead Inventory at LME
)- Since early 2009 inventory is running at its peak level in LME. LME stores inventory for commodities.
)- Except for Copper inventory levels stored at LME are running at high levels as compared to Oct 2008 for lot of metals.
)- Despite the increase in inventory, prices have increased for Zinc and Lead.
)- In last two years higher proportion of inventory at LME for various metals is blocked in Forward contracts (Called as inventory financing). This inventory blocked in forward contracts is not available for spot markets. This might be one reason for prices to go up despite inventory increase. How much of Lead and Zinc inventory is blocked in this invnetory financing? I dont know.
)- One of the reason for increased proprtion of inventory financingcould be-Warehouse rent and interest rates are running at historical lows.
)- Another reason could be the expectation that future prices are going to be much higher than current prices because of rampant inflation, after monetary easing,expected by some doom sayers.
)- Zinc and Lead go hand in hand as they have the same alloy (Can somebody confirm this??)
Lead Demand and Supply
)- Majority of demand is from battery. In India demand for battery is driven by recent boom in Auto industry. Domestic demand is very robust just like our economy.
)- Hindustan Zinc (Sterlite group) is the biggest player in Zinc and Lead production. It has plans to expand its production over next 2-3 years. I think it is amongst top 5 producers of zinc and lead in world (Somebody confirm this??) and going by its plans it might as well end up in top 3 players in another3-4 years.
-Somebody please read more about Hindustan Zinc and enlighten the forum.
Pondy Oxide
**)- **Risk to pondy oxide lies in sudden price drops. As Ayush told on Sunflag post, companies keep inventory (alloy for zinc and lead in this case) for certain period and have to incur inventory losses if the price of end product (which is lead metal) and thus the raw materialdrops sharply. Pondy being a small company with tight liquidity situation (as is evident from very high working capital loans) may not keep high levels of raw material inventory. Can anybody throw some light on their raw material purchases etc.
)- Sudden price drop can come either if the demand slows down suddenly or if the commodity bubble burst.
)- Domestic demand is unlikely to see a sudden drop in another one year.
)- Dont know much about international demand but clearly it is more volatile than domestic demand. And this was precisely why i wanted to know whether the new capacity is for exports or domestic demand in my last post on pondy oxide. As the new capacity is for exports, it is likely to be more volatile capacity utilization. This has to be read with reference to managementâs claim (as said by Donald) that they can sell twice as much as they are producing now.
)- International demand supply scenario can also be influenced by inventory blocked at LME for forward contracts. This can always be a hangover on the metal prices. As i said earlier i do not know how much of such blocked inventory is there for lead. But if it is large and this inventory is released in spot market then prices will crash. Possibility of such scneario is low at the moment. It can only happen when the commodity bubble bursts and at the moment there are no signs of it. But as all of us know that when bubble bursts everybody is taken by surprise.
)- Keep watching China. All commodities are directly related to consumption in China. Recently it increased interest rates which took everybody by surprise. First day commodity prices went down but there are no signs of any beginning of downward trend after that.
)- For me another risk is the capital allocation for next 2-3 years. 40 Cr capex plus 45 Cr working capital. Approx 80 cr cash is needed. It needs a superb execution from management. Scope for error is very low.
)- Valuations are attractive but as Ayush says value differs from person to person 
). Will the working capital to sales deteriorate further from here because of sales mix change?