SMM Morning Comments (May 4): Base Metals Closed Mixed on Expected Fed Rate Hike

SHANGHAI, May 4 (SMM) – LME base metals closed mixed last night. On the macro front, the US Federal Reserve raised interest rates by 25 basis points to 5.00-5.25% at its May meeting. The wording of the Fed's resolution is relatively neutral. The market expects the Fed to pause the current round of interest rate hikes, and the focus will turn to Fed Chairman Powell's speech later.

Copper: LME copper closed at $8,595/mt last Friday evening, a drop of 0.39%. Trading volume was 15,000 lots and open interest stood at 255,000 lots. SHFE was closed last Friday evening due to the Labour Day holidays.

SMM data shows that as of April 28, SMM copper inventory across major Chinese markets stood at 163,500 mt, down 13,400 mt from April 17 and down 20,000 mt from April 21. The inflow of some imported copper after customs clearance increased inventories in Shanghai, while active stockpiling driven destocked inventories in Guangdong. After the fall of copper prices, the purchase volume of some enterprises increased significantly, but the growth was limited due to the fear of price declines. Due to the impact of the Fed's interest rate hike, copper futures prices inched lower. With the lack of upward momentum provided by fundamentals, copper prices may be affected by Fed chairman's speech on copper prices.

Aluminium: At last Friday’s night session, the most-traded SHFE 2306 aluminium contract opened at 18,485 yuan/mt, with the highest and lowest prices at 18,515 yuan/mt and 18,405 yuan/mt before closing at 18,470 yuan/mt, up 5 yuan/mt or 0.03%.

LME aluminium opened at $2,355/mt on Wednesday. With its low and high at $2,316.5/mt and $2,360/mt before closing at $2,322.5/mt, a drop of $33/mt or 1.4%.

On the macro front, the US GDP grew by 1.1% in the first quarter, which slowed down more than expected, mainly due to the decline in corporate investment and inventory. Under the high interest rate level, companies are relatively pessimistic about the future macroeconomic prospects.

On fundamentals, the domestic aluminium supply maintained a slight growth trend, and the cost of the industry has dropped significantly, which will deprive aluminium prices of cost support. An increasing amount of molten aluminium has been made into billets rather than ingots, driving the social inventory of aluminium ingots to keep falling. The current downstream operating rates diverge from the inventory data. If the end demand is still lower than expected in the future, aluminium billet inventory may grow, which will drive smelters to produce more ingots instead of billets. As it takes time for weak consumption to be reflected in inventory, aluminium ingot inventory may remain low and continue to drop in May. SMM predicts that aluminium prices will come under downward pressure after the Labour Day holiday, but low inventory may limit the downside room.

Lead: The marker was under the pressure of poor economic outlook this week. LME was closed on Monday amid the bank holiday in the UK and LME lead opened at $2,153.5/mt this Tuesday, and then hit the lowest pint at $2,120/mt, down 1.42% during the week.

SHFE was closed for the Labour Day holiday.

Zinc: Overnight, LME zinc opened at $2,602/mt and hit a high of $2,620/mt before closing at $2,617/mt, up $25/mt or 0.96%. LME zinc prices were bolstered by a softened US dollar index. Trading volume was down to 6,336 lots, and the open interest rose by 1,396 lots to 186,000 lots. LME zinc inventory shed by 500 mt to 52,525 mt.  

SHFE was closed yesterday for the Labour Day holiday.

On the macro front, the US Fed raised the interest rate by 25 bp as expected, which boosted the rate to the highest level since August 2007. Although the Fed hinted at a pause to the rate hikes, the market was still beset with a possible economic recession.

Tin: Last week, SHFE tin prices fell before rising and the spot transactions of tin ingot were thin. Social inventory of tin ingot accumulate significantly by 590 mt and stood at 11,128mt.

In addition, the operating rates of refined tin smelters in Yunnan and Jiangxi dipped 1.75 percentage points to 52.73%. In Yunnan, a smelter reduced the production and a smelter was shut down for maintenance. In Jiangxi, a smelter slightly reduced the production while a smelter had no output for the time being. Most smelters maintained normal operations during the Labour Day holiday, only few smelters slightly reduced the production.

Overall, the current domestic demand for tin ingot has not yet seen signs of improvement. Further attention should be paid to the low profits and the production cuts. If smelters still maintain high production, the tin inventory is unlikely to fall smoothly in the short term.

Nickel: Some imported pure nickel flowed into the Chinese spot market for delivery of long-term contracts in May, easing the supply tightness in China. Nickel ore shipments from the Philippines stood low as the mines in the country were less willing to ship cargoes, which tightened the nickel ore supply in China.  On the demand side, according to the production schedules of stainless steel mills in May, the primary nickel demand is expected to grow. In terms of alloys, nickel plate demand from the military alloy sector remained stable. To sum up, the supply tightness of pure nickel was eased, and the downstream demand stayed stable. The nickel prices will remain rangebound with some downward potential.

[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.]