Lead crunch has battery makers seeing red

The price of the non-ferrous lead could continue to rise for the remainder of the calendar year 2007 (CY07) given signs of a growing adverse demand-supply balance.

According to a recent report by London-based Natixis Commodity Markets, lead deficit is expected to touch 60,000 tonne in CY07 as compared with the earlier estimated shortfall of 35,000 tonne.

Also, the International Lead and Study Group, the global industry body, has forecast strong demand from user industries for lead in CY08 at 4.1 per cent.

Lead is primarily used in the manufacture of batteries by players like Exide Industries and Amara Raja Batteries. Higher input prices could hurt their operating margins.

Lead currently trades on the London Metal Exchange (LME) at $3,829 a tonne-level. Meanwhile, the average lead price in the September 2007 quarter was $ 3,140.9 a tonne on LME as compared with $1,189.4 in the corresponding period of last year.

For battery manufacturers, lead as a percentage of net sales typically accounts for 60 - 63 per cent. Battery manufacturers employ a range of hedging techniques to minimise the impact of higher lead prices, coupled with price hikes of their products.

For Exide Industries, in the September 2007 quarter, however, the adjusted raw material costs as a percentage of net sales went up a whopping 750 basis points year-on-year to 63.6 per cent due to the higher lead prices. Higher input prices Also resulted in Exide Industries' operating profit margin declining 110 basis points to 17.5 per cent.