SMM Morning Comments (Jul 29): Base Metals Closed Mostly with Gains amid Easing Market Sentiment, but Recession Fears Still Haunted the Market

SHANGHAI, Jul 29 (SMM) – LME base metals closed mostly with gains as the market sentiment eased slightly after the dovish speech of US Fed Chairman Powell. However, the US Department of Commerce announced that annualised gross domestic product (GDP) fell 0.9% in the second quarter, compared to a Reuters poll estimate of 0.5% of growth. The economy contracted by 1.3% in the first half of the year, meeting the definition of a technical recession.

LME copper added 1.1%, aluminium gained 1.61%, lead slid 0.2%, and zinc jumped 4.56%.

SHFE copper added 0.98%, aluminium lost 0.13%, lead slid 0.1%, and zinc jumped 2.8%.

Copper: LME copper opened at $7,731.5/mt yesterday and fell to $7,684/mt after reaching $7,789/mt. At last, the contract closed at $7,739/mt, up $84.5/mt, or 1.1%. Trading volume was 16,500 lots, and open interest stood at 232,000 lots.

The most-traded SHFE 2209 copper contract opened at 59,610 yuan/mt in overnight trading and then climbed to 55,960 yuan/mt after the short-selling. SHFE contract once dropped to 59,230 yuan/mt along with the falling LME copper. At last, the contract closed at 59,700 yuan/mt, up 580 yuan/mt, or 0.98%. Trading volume decreased by 89,200 lots to 72,100 lots, and open interest stood at 156,000 lots.

Yesterday, the Fed announced the results of the interest rate hike. Powell's dovish speech caused the US dollar index to drop sharply but pushed up the copper prices. However, the fear of an economic recession still exists. The data shows that US consumer spending has grown at the slowest rate in two years, while corporate spending has declined. In the second quarter, US GDP shrunk for two consecutive quarters, which means that the US economy is at risk of falling into recession. In fear of the persistent economic recession, the market has strengthened its expectation of the Fed to slow down the pace of interest rate hikes.

Besides, the social inventory across China has been declining recently. The fundamentals have also given support to copper prices to a certain extent. It is expected that copper prices will run strongly in the near future. In the spot market, in the last two trading days of July, the premiums fell along with the drop in demand for cash of some cargo holders. At the same time, the opening of the import window over the 2208 copper contract also put pressure on the premiums to some extent in anticipation of the flowing of imported copper. It is expected that the near-month contracts will remain strong in the short term, and the premiums may fall further.

Aluminium: The most-traded SHFE 2209 aluminium contract opened at 18,700 yuan/mt overnight and rose to 18,775 yuan/mt before closing at 18,705 yuan/mt, down 25 yuan/mt or 0.13%.

LME aluminium opened at $2,430/mt on Thursday and closed at $2,465/mt, an increase of $39/mt or 1.61%.

The interest rate hike was in line with the market expectations. Aluminium smelters in south-west China suffered losses, which slowed their pace of production resumption. Some aluminium smelters in Sichuan reduced production due to staggered power use. However, the domestic operating aluminium production capacity increased slightly in July. There are few new orders in downstream sectors in the off-season. Poor consumption caused aluminium ingot social inventory to fall at a slower pace while aluminium billet inventory rose.  On the whole, the digestion of bearish macro events has allowed aluminium prices to rebound, but whether the rally can sustain will depend on fundamentals.

Lead: LME lead opened at $2,021/mt last night and fell 0.2% to $2,006/mt, with the highest and lowest prices at $2,047/mt and $1,975/mt respectively. The open interest increased by 319 lots to 87,547 lots from the previous trading day.

The most traded SHFE 2209 lead contract opened at 15,255 yuan/mt and fell by 0.1% to end at 15,220 yuan/mt, after hitting the lowest point at 15,190 yuan/mt and rising to the highest level at 15,285 yuan/mt. The open interest decreased by 542 lots to 58,291 lots from the previous trading day.

Zinc: LME zinc closed at $ 3,176.5/mt on Thursday, up $138.5/mt or 4.56%. The open interest lost 1,857 lots to 198,000 lots. Overnight LME inventory dropped 1,025 mt to 70,800 mt, remaining low. Short spot supply and energy crisis dragged on the production resumption of smelters, and the forward supply is unlikely to rise, underpinning zinc prices.

The most traded SHFE 2209 zinc contract closed at 23,705 yuan/mt overnight, up 645 yuan/mt or 2.8%. The open interest rose 547 lots to 113,000 lots. On the supply side, ore imports have arrived in China, and most domestic smelters have finished restocking for the third quarter. TCs for domestic zinc concentrate in August added 150 yuan/mt to 3,900 yuan/mt in metal content. In addition zinc ingot supply is expected to rise to 510,000-520,000 mt MoM in August. On the consumption side, the downstream consumption remained poor, and will remain so in the short term. In the spot market, SHFE zinc prices rebounded after the US Fed finalized the July rate resolution, and the cargo holders lowered their premiums to clinch a deal. But the downstream turned wait-and-see after zinc prices rose, resulting in muted transactions.

Overnight, the Political Bureau of the Central Committee of the Communist Party of China (CPC), at its meeting on Thursday, mentioned the goal "to ensure the delivery of properties", and prioritised "stabilising the real estate market" before "no speculation in housing". The focus of the real estate sector in the second half of the year is expected to be on the prevention of risks caused by rotten buildings and the accumulation of debt by developers.

The US Department of Commerce announced that annualised gross domestic product (GDP) fell 0.9% in the second quarter, compared to a Reuters poll estimate of 0.5% of growth. The economy contracted by 1.3% in the first half of the year, meeting the definition of a technical recession. The US economy unexpectedly contracted in the second quarter, with consumer spending growing at its slowest pace in two years and business spending falling, increasing the risk of the economy falling into recession.

Eurozone economic sentiment deteriorated much more than expected, with the economic sentiment index falling to 99.0 in July from 103.5 in June and the consumer confidence index falling to minus 27.0 from minus 23.8, a new low since the indicator became available in 2000. Optimism fell across all sectors and consumer confidence hit a record low amidst the war in Ukraine and rampant inflation.

Tin: SHFE tin fell below 190,000 yuan/mt overnight, but then rebounded quickly. Capital continued to flow out of SHFE tin market. Domestic tin inventory under warrants was little changed recently. The performance of the spot market was poor. LME tin inventories continued to accumulate slightly. LME tin prices moved sideways at lows. The import profit window was still closed. A small amount of imported tin was quoted at discounts. The recent production resumption of smelters has not yet shocked the spot market. SHFE tin is expected to hover at lows before more cargoes flow into the spot market.

Nickel: On the supply side, the improvement of the price ratio and the sufficient overseas pure nickel sources suppressed the domestic pure nickel premiums to some extent. In terms of NPI, the terminal demand weakened, and the prices kept declining. On the demand side, according to the SMM survey, the spot prices of stainless steel in the Wuxi and Foshan markets dropped in the early trading today. Recently, the social inventories in these two places were declining, and the spot prices at the end of July were weak and stable. In terms of alloy, although the spot premiums kept falling, the absolute price was still high, and the purchases in recent days were not as good as the previous weeks. To sum up, the Fed's interest rate hike was basically in line with market expectations, boosting commodity prices. In addition, the low nickel inventory supported the nickel prices. However, under the expectation of an oversupply of primary nickel in the long run, nickel prices may maintain a downward trend.

[Disclaimer: The above representation and data is based on market information SMM believes to be reliable at the time of acquiring as well as the comprehensive assessment by SMM research team, and any and all information provided in this article is for reference only. This article does not constitute a direct recommendation for investment or any decisions in any form and clients shall act on their own discreet and any decisions made by clients are not within the responsibility of SMM.]