Lead, Zinc Rise in London as China Output Cuts May Erode Supply

By Claudia Carpenter

July 14 (Bloomberg) -- Lead and zinc gained in London on expectations that output cuts in China, the world's largest producer, may erode inventories. Aluminum and copper declined.

China's smaller zinc and lead smelters will cut output by 10 percent for three months, the Shanghai Nonferrous Metals Trade Association said. Zinc supplies will exceed demand by 215,000 metric tons this year compared with a surplus of 26,000 tons for lead, the International Lead and Zinc Study Group says.

``A three-month cut in output would go pretty close to wiping out the lead surplus,'' said David Thurtell, an analyst at BNP Paribas SA in London. ``It's widely agreed the zinc surplus is well above that.''

Lead for delivery in three months gained $17, or 0.9 percent, to $1,982 a ton as of 10:29 a.m. on the London Metal Exchange. Zinc rose $8, or 0.4 percent, to $2,033 a ton.

Lead, mostly used in car batteries, is the biggest decliner on the exchange this year, down 22 percent. Zinc, used to galvanize steel, is down 14 percent. Mines may be forced to close because prices are below production costs, Donald Lindsay, chief executive officer of Teck Cominco Ltd., said May 23.

Inventories of lead in warehouses monitored by the London Metal Exchange dropped 3,175 tons, or 3.2 percent, to 95,775 tons, the biggest decline since August 2007. Zinc stockpiles increased 1,175 tons to 152,175 tons, the exchange said.

The owners of the largest zinc smelters will meet in two days to consider their own production cuts, said Han Minzhi, general manager of marketing and sales at producer Shenzhen Zhongjin Lingnan Nonfemet Co. ``This meeting will have a more significant impact'' than the agreement by smaller producers, Everbright Securities Co. analyst Wang Feng said.

Zinc Outlook

Increased zinc supplies will push average prices from 95.3 cents a pound ($2,101 a ton) this year down to 90 cents next year, Macquarie Group Ltd. analysts including Jim Lennon wrote in a report today. The forecasts were lowered from $1.076 a pound this year and $1 a pound next year. The average for the three- month zinc contract is $2,272.55 a ton so far in 2008.

Lead will average 96.5 cents a pound this year, down from a previous forecast of $1.316 a pound, and 85 cents next year, down 29 percent from the previous forecast, according to the report.

Macquarie raised its copper forecast to $3.841 a pound from $3.634 in 2008, and kept its forecast at $3.25 a pound in 2009. Copper rose $25 to $8,295 a ton in London. Copper inventories gained 600 tons to 124,725 tons.

Aluminum fell $21.75 to $3,295.25 a ton in London. Aluminum stockpiles rose 2,050 tons to 1.09 million tons. Norsk Hydro ASA, the world's fourth-largest aluminum producer, slumped the most on record in Oslo trading after saying rising costs and power derivatives eroded second-quarter profit.

Tin was unchanged at $22,900 a ton and nickel dropped $100 to $21,500 a ton. Nickel may average $11.008 a pound this year, down 19 percent from a previous forecast, Macquarie said. The bank lowered its 2009 forecast 13 percent to $9.625 a pound.

To contact the reporter on this story: Claudia Carpenter in London at ccarpenter2@bloomberg.net