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By Michael Taylor
LONDON, Dec 12 (Reuters) - Low stocks and strong demand from battery makers could help lead power ahead and become the best placed industrial metal to weather the global economic downturn.
Negative data for the auto industry, a slowdown in demand as economies weaken and a rise in physical stock levels have hit industrial metals prices in recent months.
The LME lead contract, which hit an all-time high of almost $4,000 in 2007, fell to $921.25 a tonne this month -- its lowest since Sept. 2005. It shed more than 25 percent last month alone.
"There is a large portion of lead consumption that isn't tied to the economic cycle," said Gayle Berry, an analyst at Barclays Capital. "The market has looked at the fall in vehicle production and sales, and they have overreacted and panicked."
Lead, platinum and palladium, used widely in the auto industry, have been hard hit by data showing U.S. monthly autos sales fell nearly 37 percent in November, to their lowest level since 1982, and that the German auto industry is heading for its worst year for domestic car sales since reunification in 1990.
The U.S. Senate's failure to agree on a $14 billion bailout for troubled U.S. auto makers late on Thursday has added to the gloom.
But experts believe lead should not be lumped with other industrial metals.
Only around 10 percent of lead demand is directly linked to new vehicle production, through new batteries, and about 40 percent of lead is used in car replacement batteries.
The remainder of lead consumption is mixed, but includes 25 percent from industrial batteries.
And as economies worsen, motorists are hanging onto their cars for longer and demand for recycled batteries is increasing.
"No doubt whatsoever that (lead) demand is the most recession proof of the six (London Metal Exchange) metals," said Stephen Briggs, analyst at RBS Global Banking & Markets.
"Replacement battery demand will continue to grow ... that's critical. It is 40 percent of the market that will not decline and you can't really say that about any other metal. Lead demand is going to hold up better."
CHINA DEMAND
A November report from the International Lead Zinc Study Group (ILZSG) said lead demand, helped by growth in China, rose 5.8 percent to 6.427 million tonnes in the first three quarters of 2008 from 6.074 million in the same period a year earlier.
The ILZSG also said net exports of refined lead from China were significantly lower at 8,000 tonnes compared with 164,000 tonnes during January to September 2007.
London Metal Exchange lead stocks have fallen around 60 percent since June highs of over 100,000 tonnes to about 44,000 tonnes now, and are below the levels at the start of this year. At the same time, stocks of other industrial metals have risen sharply.
"The bottom line ... is that lead is less exposed to the credit crunch than the other base metals," Societe Generale analysts said in a recent research note.
But a potential risk to lead's bright outlook is market talk that China could cut its 10 percent export tax on the metal.
"That is without doubt a wild card and would be negative," RBS' Briggs said. "If you got rid of that export tax it would change the situation overnight. It is a real possibility."
A decision by Western Australia on whether to allow Toronto-listed Ivernia to reopen its Magellan lead mine is expected next year, could also weigh on lead prices. But with current prices low, some believe Ivernia will not re-open it.
Low metal prices have also resulted in output cuts of sister-metal zinc, another potential upside for lead as both metals are usually mined together.
"Lead mine supply for 2009 is tightening rapidly," Barclays Capital's Berry said. "Lead is one of the more favourable metals."
(Editing by Sue Thomas)