Secondary lead has long influenced the lower bound of SHFE lead prices through both cost and supply channels. SHFE secondary lead delivery will first be permitted under the PB2703 contract, although eligible brands and warehousing arrangements remain to be confirmed. However, scrap constraints, smelter margins and delivery economics will determine the scale of actual warehouse flows.
Scrap constraints persist despite modest growth
Tight scrap battery supply, alongside continued capacity expansion at secondary lead smelters, has long limited output growth. China’s secondary lead smelting capacity stood at 8.6 Mt in 2025 but utilisation rates were significantly lower, at about 30%, indicating that the sector is constrained less by investment than by access to raw materials.
Our model estimates domestic end-of-life scrap battery supply based on the segmented vehicle fleet size, battery lifetimes and recovery rates. While generation will continue to increase through to 2029, it will not keep pace with demand for feedstock from secondary smelters. Their output is expected to grow by 1% CAGR until end-decade, cementing a persistent and widening scrap deficit for the region.
For SHFE secondary lead delivery, rising scrap generation matters, but warehouse inflows will also depend on the availability of exchange-eligible metal. This will depend on brand registration of certified producers, physical demand and delivery economics.
Weaker smelter economics will limit delivery participation
Lead smelter profitability will be a key determinant of actual delivery participation. Public disclosures indicate that tax rebates have materially supported earnings even when smelting margins were weak. Subsequently, producers in Anhui, Jiangsu and Jiangxi remain highly sensitive to tighter reviews, stricter compliance and invoicing disruptions.
Pressure is also evident in the recycling chain. Reverse invoicing and tighter tax enforcement will improve formalisation over time, but they have also reduced scrap battery supply, increased business complexity and raised procurement costs. By-product recovery offers limited support, too. Some larger smelters recover minor metals such as tin, but sulphur dioxide concentrations are generally too low for viable acid production, leaving sulphuric acid economics weaker than in primary lead.
Warehouse inflows will depend on delivery spreads
Current delivery economics do not favour near-term warrant creation. Based on average secondary lead spot prices from January to end-July and assuming one month of storage, the estimated delivery margin remains negative. Secondary lead spot prices traded RMB14 /t higher than modelled SHFE delivered cargoes, implying physical spot sales outside of the exchange would be preferred.
Warehouse flows will therefore remain limited while physical demand supports spot prices. However, SHFE secondary lead delivery will provide an alternative sales outlet for qualifying secondary lead when physical demand weakens, widening the spread between SHFE futures and spot prices. This mechanism will become more relevant as additional brands secure delivery approval and build the financial capacity to hold inventory and register warrants.
Execution of cargoes will be first implemented in the PB2703 contract, although eligible brands and warehousing arrangements remain to be confirmed. Product consistency and impurity control will continue to differentiate demand for substitute-grade material in the physical market. Once details are finalised, qualifying material facing a wider physical market discount will incentivise warrant registration. This will increase inventory visibility, limit excessive strength in nearby contracts and increase the role of secondary lead in SHFE price formation.
We expect warehouse deliveries to rise in the early stages of delivery acceptance, as larger operators register brands to gain greater stock-management flexibility and establish stop-loss options. Smaller smelters will face barriers related to registration, quality control, compliance and inventory financing.
Typically, Chinese battery manufacturers favour standard (primary) grade material for battery production. With the inclusion of secondary material now on exchange, this could incentivise battery manufacturers to intake this material at a discount and therefore improve the margins in their respective battery production facilities. Additionally, the inclusion of this material on the exchange further represents China’s ambition to clean up supply chains while supporting demand via the pursuance of greater domestic recycling capabilities.
For more insight into China’s lead market, including secondary lead supply, scrap battery supply and SHFE lead prices, CRU’s Lead service provides detailed analysis of market balances, prices and emerging delivery trends. Contact us here to find out more.
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