SMM Morning Comments (Feb 7): Base Metals Closed Mostly with Losses on Demand Worries

SHANGHAI, Feb 7 (SMM) – SHFE and LME base metals closed mostly with losses overnight. On the macro front, last Friday's strong U.S. jobs report raised the odds that the Federal Reserve will keep raising interest rates for longer to combat inflation. And the market is still worried about the recovery of Chinese demand.

Copper: LME copper prices closed at $8,899.5/mt in overnight trading, a decline of 0.29%. Trading volume was 17,000 lots and open interest stood at 254,000 lots.

The most active SHFE 2303 copper contract finished at 67,990 yuan/mt overnight, down 0.73%. Trading volume was 39,000 lots, and open interest stood at 161,000 lots.

On the macro front, last Friday's strong U.S. jobs report raised the odds that the Federal Reserve will keep raising interest rates for longer to combat inflation. The market is still worried about the recovery of Chinese demand. In terms of fundamentals, as of Monday February 6, copper stocks in mainstream Chinese markets tracked by SMM increased by 16,700 mt from last Friday to 314,400 mt, and the total inventory increased by 117,800 mt compared with 196,600 mt before the Chinese New Year holidays. The main reason is that the enthusiasm for purchasing after the downstream production resumptions was subdued, and the smelters’ willingness to sell was weak amid large discounts, resulting in high arriving shipments at warehouses.

In terms of consumption, it is expected that consumer orders will not recover until late February. Most copper semis producers are optimistic over the market outlook. Copper prices fell due to the rise of the US dollar and market concerns about domestic demand.

Aluminium: The most-traded SHFE 2303 opened at 19,080 yuan/mt, and hovered around 19,000 yuan/mt during the night session. LME aluminium opened at $2,571/mt on Monday, and dropped in European trading hours to a low of $2,503/mt before closing at $2,544/mt, down 0.86%.

On the fundamentals, the supply in Yunnan province is expected to fall, while on the demand side, the spot market gradually picked up with downstream players resuming the production gradually, which offered some support to aluminium prices. Therefore, it is expected that aluminium price will move rangebound in the near term. The production curtailment as well as the inventory accumulation is worth attention at present.

Lead: Overnight, LME lead opened at $2,105/mt. During the Asian trading hours, LME lead rose to around $2,150/mt. During the European trading hours, LME lead fell to $2,082.5/mt as the US dollar index increased amid the hawkish remarks. LME lead finally closed at $2,100/mt, a decrease of 0.17%.

The most-traded SHFE 2303 lead contract opened at 15,280 yuan/mt and decreased 0.65% to close at 15,175 yuan/mt last night amid the falling LME lead prices, with open interest increasing 2,271 lots to 73,830 lots.

Zinc: Overnight, restrictions on real estate market were relaxed in many Chinese provinces. Wuhan: Housing purchase restrictions will be adjusted dynamically; Harbin: Housing subsidies are assessable to more people; Weihai, Shandong: The down payment ratio for the first house is reduced to 20%; Anyang, Henan: Housing subsidies will be offered ranging from 30,000-50,000 yuan. A number of European and British central bank officials made hawkish remarks in favour of further interest rate hikes. Following the hawkish signal conveyed in the non-farm payrolls report, the President of the Federal Reserve Bank of Atlanta warned that strong employment rate may push the interest rate peak higher than previous forecast. India's Oil Minister said that oil prices will determine whether Russia could remain India's largest oil supplier while pointing at the possibility of increasing oil imports from other countries such as the United States. Saudi Arabia raised the prices of crude oil for March, and hiked its flagship crude oil prices for Asian buyers for the first time in six months. Two strong earthquakes of magnitude 7.8 hit Turkey within 12 hours, causing the explosion of a natural gas pipeline. The stock exchange suspended short selling, and lira, the currency of Turkey, hit a record low.

Yesterday, LME inched up after opening stable but lacked sufficient momentum. Later, LME zinc tumbled and closed at $3,121/yuan, down $94/yuan. LME zinc inventory shed by 150 mt to 16,225 mt.

Yesterday, SHFE zinc went down and neared the lower end of the Bollinger Band before closing at 23,420 yuan/mt. On the macro front, the US dollar remained strong, still weighing on zinc prices. On the fundamentals, the enterprises were passionate about stockpiling amid falling zinc prices, resulting in brisk transactions in the market.

Tin: SHFE tin prices plunged sharply after opening yesterday night, and then fluctuated at 215,500 yuan/mt. The trading volume of the most-traded contract increased by 1,739 lots.

Domestic tin inventory under SHFE warrants increased significantly and the discounts of spot prices rose obviously. Trades in the spot market improved slightly due to the great fall in tin prices and the recovery of production. The expected import profits were limited. But the import window was opened as the imported tin prices were lower than the domestic ones.

In terms of futures prices, the SHFE tin prices plunged after opening last Friday and closed at 215,500 yuan/mt. The open interest of the most-traded contract increased significantly. The open interest of forward-month contract increased slightly and more funds flew into the market.

To sum up, the huge increase in inventory caused by the longer vacation taken by downstream enterprises will ease with the resumption of downstream. The market players hold different outlooks towards the market amid the falling prices. Tin prices are expected to fluctuate widely in the follow-up stage.

Nickel: On the supply side, SHFE nickel prices trended lower in the early trading yesterday. The downstream restocking demand pushed up the spot transactions and the number of inquiries. NPI sellers insisted on high quotes since they expected the consumption to grow somewhat after February 5. On the demand side, according to SMM research, Tsingshan finally offered the bid price for March, which was higher than market expectations; however, sellers still quoted cautiously in the intraday trading. Downstream processing plants have also resumed their production one after another. Alloy manufacturers were more willing to inquire amid the crashing pure nickel prices, and they may buy raw materials on rigid demand. In general, the demand for pure nickel grew as the nickel prices dropped yesterday. SMM believes that the nickel prices will move rangebound today.

[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.]