Investors ditch zinc for lead as supply tightens

* Forward curve shows physical tightening in lead
* Some investors going long lead, short on zinc
* Lead seen in deficit in 2014, zinc in surplus

Some investors are switching long zinc positions to lead on the view that others got the timing wrong on when zinc would feel the impact of dwindling mine supplies, analysts say.

The increasing scarcity of immediate supply for lead and the more plentiful spot market for zinc - the best performing industrial metal of 2013 - is showing up in near-term forward curves of the metals, moving in opposite directions.

"We think the zinc story is reasonably strong but we don't think it's a 2014 story," Hermes Fund Managers' metals analyst Joseph Murphy said.

Spread and ratio trades between the two metals, often found in the same mines, is a top play among investors and traders.

They piled into zinc last year, betting on shortages from big operations such as Australia's Century mine, the world's No. 3. The mine, owned by China's MMG Ltd , is due to see output drop this year and run out of ore in mid-2015. 

"Fundamentally zinc is improving, but over a longer time frame. Lead has more solid fundamentals now," Standard Bank analyst Leon Westgate said. "Lead should outperform zinc by some margin (in the coming weeks)."

Lead usually sees more demand in the winter as car batteries often go dead in cold weather and need to be replaced.

"We have a moderately constructive outlook for lead heading into 2014 a function of healthy auto sales growth in the U.S. and China, higher industrial battery demand growth in China, ongoing mine production challenges and flat Chinese refined lead production," Deutsche Bank analyst Grant Sporre said in a note.

Cash zinc had been at a premium to the three month contract of $9.50 a tonne at the start of the year, indicating shortages, but this has flipped to a discount of $13.60.

Lead, by contrast, has trimmed its cash-three month discount to $14.39 a tonne from $28.50 at the start of 2014.

The broader supply-demand balances also favour lead.

"There's been quite a lot of interest ... in putting the spread trade back on where you are long the lead leg and short the zinc leg," Hermes Fund Managers' Murphy said.

"We think zinc is overpriced at current levels and we expect it to underperform, particularly against the likes of lead over the next few weeks," he said.

The gap between the price of the two metals narrowed to $87 on Jan. 9 from nearly $200 a month earlier as cheaper zinc moved closer to lead, but it has since moved back to about $150.

Murphy is targeting the spread to move to $170-$180, not to the widest gaps of last year of over $200.

The price of benchmark zinc on the London Metal Exchange gained 12 percent from late November to last Wednesday, but has since shed more than 4 percent.

The lead market is expected to have a deficit of 22,000 tonnes by the end of this year, deepening to 51,000 tonnes in 2015, according to consensus forecasts of analysts polled by Reuters.

Zinc, on the other hand, is forecast to have a 96,000 tonne surplus this year, narrowing to 17,500 tonnes in 2015.