SHANGHAI, Nov. 24 (SMM) -- Last week, China A-share markets strengthened following President Obama's visit to China, and prices for gold and crude oil steadily improved, and Dow Jones index closed at 10,437.42 points on November 17th, a new record high of closing prices so far this year. Domestic base metal prices gained across the board along with rising stock markets and higher commodity prices, as well as concerns over goods transportation amid heavy snows. SMMI was up 1.36% over the past week, with SMMI.Cu and SMMI.Zn leading the increases, up 1.9% and 1.27%, respectively. SMM believes domestic base metal markets will remain on an upward track from expectations of inflation.
Last week, the US dollar index rebounded from comments by the US Federal Reserve chairman on the importance of strengthening the US dollar, and from lower-than-expected industrial output and new housing starts. However, the US dollar index generally remained within the 74.6-75.5 range.
China A-share stock markets advanced following President Obama's state visit to China, giving a boost to domestic base metal markets as well. All copper futures contracts for delivery in different months on the Shanghai Futures Exchange (SHFE) hit several new highs for the year, with current-month copper prices gaining as high as RMB 53,800/mt. Transactions were brisk, and trading volumes expanded rapidly. Positions increased from 341,202 lots to 350,490 lots.
However, market transactions in the Shanghai spot market were depressed despite strengthening futures markets. Cautious trading sentiment dominated the spot market over the past week, with the exception of Monday, when a large number of optimistic buyers entered the market. Spot discounts remained in the negative RMB 200-300/mt range.
Domestic aluminum producers maintained normal production. Traders showed higher interest in selling goods to generate cash before the end of the year. Supply of scrap copper remained tight, and optimistic cargo-holders were unwilling to move goods.
Orders received by copper rod producers, the largest copper consumption sector, were down. Continuous increases in copper prices are also increasing pressure on end-product enterprises, hampering sales of copper rod producers and forcing them to put finished goods normally scheduled for delivery into warehouses, and is one reason behind waning purchase interest in refined copper.
SMM believes the following factors will affect LME copper price trends in the coming week. First, the US dollar index is turning downward at 75.5, and is expected to retreat to around 74.5. Second, crude oil prices are again above USD 80/bbl. Although this price is not firm, declines in stocks will remain positive for higher crude oil prices. Third, gold futures prices remain firm above USD 1,000 per ounce, and will also provide support to copper prices.
In this context, SMM estimates LME copper prices will test USD 7,000/mt in the coming week, and will find solid support at USD 6,800/mt.
SHFE aluminum prices moved higher, as LME aluminum prices rose and from expectations of higher domestic alumina and electricity prices. SHFE three-month prices rose above RMB 15,600/mt with the start of the new contract month. However, high inventories and weak consumption are affecting spot transactions, with discounts expanding to negative RMB 150/mt. Downstream producers are showing little interest in high-priced goods, resulting in overall weakness in transactions.
Recent increases in aluminum prices have been attributed to the demand for keeping up with higher prices of other base metals, as aluminum prices have been slower to advance for a long time. Positions have experienced marked declines as LME aluminum prices rise, an indication of strong short covering.
SMM is still optimistic view towards mid-term aluminum prices, but the strength of prices will depends on whether or not LME aluminum prices are firm at USD 2,000/mt and are supported by other base metals or by positive news.
SHFE aluminum prices will continue to face pressure from spot markets, and will likely experience step-like corrections after being pushed up by LME aluminum markets.
Next week, SMM predicts SHFE three-month aluminum prices will move above RMB 15,500/mt, and spot aluminum prices will attempt to stabilize at RMB 15,000/mt. Spot discounts will likely widen further.
Domestic lead prices lacked further upward momentum after mainstream traded prices advanced to RMB 15,550-15,700/mt. Earlier in the week, domestic lead prices added RMB 200/mt, up from RMB 15,500/mt, due to concerns over market supply affected by heavy snows in China. In this context, both suppliers and buyers accepted a price of RMB 15,700/mt. However, domestic lead prices continued to meet resistance at RMB 16,000/mt given high trading inventories and the pursuit of cash at the end of the year by enterprises throughout the supply chain.
On Wednesday, LME lead prices failed to advance, and struggles between upstream and downstream producers re-emerged in domestic lead markets. Smelters were reluctant to sell goods at low prices in face of growing production pressure, while downstream producers purchased on an as-needed basis in view of ample low-priced goods. Transactions in domestic markets improved at first, but later waned.
The 4th Shanghai Lead and Zinc Summit was successfully held from November 13-15th. The attendees held an optimistic outlook towards overall market movements in 2010, which injected the confidence into the zinc market.
Last week, all zinc futures contracts for delivery in different months on the SHFE strengthened, hitting several new highs. The average weekly traded price of #0 zinc in Shanghai was RMB 16,989/mt, up RMB 546/mt or 3.3% from the previous week. On Friday, when zinc prices climbed above RMB 18,000/mt, with prices rising as high as RMB 18,120/mt, spot discounts expanded to RMB 800/mt. Markets in north and south China seemed to chase higher prices, an indication of bullish sentiment among downstream producers and traders, although lasting for a short time. It is worth noting that some traders reported unwillingness to move goods, raising market doubts about whether the market is shifting from buyer's to seller's market.
SMM believes it is risky to see prices being pushed up by funds under the context of weak fundamentals. Particular attention should be paid to negative impact on base metals from profit takings in the short term.
In face of unknown brand products being sold at low prices, major tin producers continued to be depressed by high costs and weak consumption, with mainstream traded prices locked in the RMB 116,000-117,000/mt range. However, select producers showed strong interest in moving goods due to cash flow pressure or ample spot supply, providing goods to the Shanghai market after cutting prices by RMB 500/mt. Such price declines failed to generate much buying interest from both traders and downstream producers, with purchases mainly based on an as-needed basis. A limited number of unknown brand arrived in the Shanghai market over the past week, creating low possibility of buying low-priced goods in the coming week. In addition, LME tin prices is currently moving around USD 15,000/mt. Hence, SMM predicts domestic tin prices will fluctuate around RMB 116,000/mt in the coming week.
Compared with the strong performance of LME nickel prices, transactions were generally modest in domestic spot market over the past week, due to weak downstream demand and a lack of confidence in market players, with most deals made by traders for stock replenishment, and consumption by end users dropped further from a week earlier. Low-priced goods were unavailable in the market since cargo-holders were only moving goods based on their own cash flow needs.
Total nickel inventories in China (including nickel and NPI) were at or slightly above 150 kt, while nickel inventories in the Shanghai market (including bonded areas) may have reached 50 kt. These high inventories are exerting great pressure on nickel prices in domestic spot markets, and are curbing any upward movement for nickel spot prices despite rising LME nickel prices.
Last week, nickel prices were higher, with LME nickel prices exceeding USD 17,000/mt, while also pushing up stainless steel prices. However, traders were still reluctant to sell goods, an indication that current prices were still lower than market expectations. Meanwhile, purchase interest remains low and market sentiment is mixed. .
According to a SMM survey of a selection of private stainless steel mills in China, many believe October orders were less than September levels, and as a result, would likely cut production or shut down for the Chinese New Year holiday in advance, given current high stainless steel inventories. At present, though, the mills are maintaining stable production rates.
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