SHANGHAI, Jan. 18 (SMM) -- China's Central Bank decided to raise the deposit reserve requirement ratio by 0.5 percentage points effective from January 18th. The increase of the ratio will freeze up RMB 300 billion of base currency. The Central Bank's move to increase the ratio marks the macro-control substantive measure to rein in liquidity. The news cooled the liquidity-swamped base metals markets. As a result, SMMI edged down 1.07% over the past week, with price declines reported after constant gains over the past one month. However, SMMI.Sn moved opposite, surging 7.57%. Among other base metals, SMMI.Zn experienced larger declines, down 3.22%.
Last week, copper prices experienced fluctuations following mixed economic news. On January 8th, the US government announced additional 85,000 jobs lost, a little worse than expected. This news eased market expectations of higher interest rates based on other recent positive economic data. As a result, the US dollar index plunged from 78.0 to between 76.9-77.0, and commodity markets rebounded. During trading hours in Asia on Monday, China's strong import and export data drove up LME copper prices, and news of China Securities Regulatory Commission approval of stock index futures trading boosted Chinese financial markets, helping LME copper prices reach as high as USD 7,700/mt. However, on Tuesday evening, China's Central Bank announced an increase in the deposit reserve requirement ratio by 0.5 percentage points effective January 18th. This unexpected news triggered market fears of tightening liquidity, and prices for crude oil and base metals fell as a result. LME copper prices slid to USD 7,300/mt, and SHFE copper prices opened down by 4% on January 13th, and SHFE 1004 copper contract prices fell as low as RMB 58,770/mt. However, SHFE copper prices showed signs of stabilizing due to strong buying interest at lower prices, with prices closing above RMB 60,000/mt.
Spot copper markets experienced little panic selling, with many traders remaining bullish. Purchasing interest was strong when SHFE copper prices fell below RMB 60,000/mt, helping prices rebound. Spot discounts changed from negative RMB 200-50/mt to RMB 0/mt, and premiums for high-quality goods climbed as high as positive RMB 200/mt.
Domestic copper smelters maintained stable production over the past week. Prices for domestic goods were firm compared with imported copper, and there was little interest in selling goods when prices fell, resulting in market supply of imported goods greater than domestic products. The higher SHFE/LME copper price ratio was also one reason imported supply was higher. Traders with goods used as a hedge were eager to sell products in view of strong profits as copper prices fell.
According to a recent SMM survey of cable and wire producers, a low demand period and rising copper prices in recent days depressed buying interest. Orders at copper cable and wire producers dropped, with declines in operating rates. Although overall demand failed to improve, transactions at lower prices on Wednesday were brisk following stock replenishment before the Chinese New Year holiday, and purchasing interest waned on Thursday when prices advanced.
Last week, copper price trends moved as economic news was released, but the biggest news was China's Central Bank's move to raise the deposit reserve requirement ratio, and had a significant negative impact on liquidity-supported base metals markets. However, despite the news, price rebounds were a sign of strong purchasing demand, giving solid support to copper prices.
The US dollar index reversed its trend since US December non-agricultural employment data, and SMM believes the US dollar index will remain weak in the week of Jan 18th -22nd .
LME copper prices have experienced corrections for two consecutive trading weeks, and the RSI index is stabilizing, while the KDJ index is rebounding from low levels. In this context, SMM forecasts that LME copper prices rise steadily in the week of Jan 18th -22nd, with prices generally moving around USD 7,500/mt, possibly reaching as high as USD 7,600/mt. Domestic spot copper prices are expected to fluctuate in the RMB 60,500-61,500/mt range.
SHFE aluminum prices lost upward momentum after fluctuating and falling by daily trading limits, with total positions down slightly. However, long position holders of SHFE three-month aluminum contracts did not withdraw from the market, helping support SHFE three-month aluminum contract prices to fluctuate around the RMB 17,500/mt mark. The significant fluctuations in futures markets dampened downstream purchase interest, but end-user demand also began to wane as the Chinese New Year holiday nears.
The impact from new domestic monetary policy announcements is waning, but SMM believes the government's move will still have an impact on future aluminum prices. Downstream consumption weakened as the Chinese New Year holiday approaches, and spot aluminum markets remain sluggish. Spot aluminum inventories also reported marked growth, so current market fundamentals will not likely push up aluminum prices further without any new positive economic news. Meanwhile, rising costs are also giving strong support to higher aluminum prices, with any possible price declines limited. However, once weather conditions worsen, tightening electric power supplies in central China will force some aluminum producers to cut production, opening up the possibility for higher aluminum prices. In general, SMM takes an optimistic views with regard to future aluminum prices, and predicts LME aluminum prices will fluctuate above USD 2,300/mt, while SHFE three-month contract aluminum prices will move around RMB 17,500/mt in the week of January 18th - 22nd.
Domestic lead prices corrected themselves over the past week after initially rising to RMB 17,000/mt. Prices of well-known branded products were firm at RMB 17,000/mt, holding goods back from markets despite falling LME lead prices on Wednesday. However, downstream demand remains weak. Downstream producers generally purchased based on as an-needed basis due to limited orders at the year end, with no strong buying interest reported, and those producers will relatively more orders had built some stocks when prices were below RMB 16,000/mt, resulting in little purchasing interest. To sum up, market transactions were quiet over the past week.
In domestic markets, both stock and futures markets closed down after the move by China's Central Bank signaled a tightening of money supply. SHFE three-month contract zinc prices moved in the RMB 20,450-21,735/mt range, hitting a low of RMB 20,200/mt on Friday, and falling a total of 7.25%. In general, zinc prices showed signs of declining, with spot zinc prices moving around RMB 20,150/mt from Wednesday to Friday. Downstream buying interest was high on Wednesday, since zinc prices fell by 4.8%, the largest intraday drop over the past week. However, the emerging weakness of SHFE zinc prices generated caution of market players with regard to the support at RMB 20,000/mt, and spot zinc markets were lackluster due to strong pessimistic sentiment.
Smelters held low interest in moving goods with zinc prices between RMB 20,000-20,200/mt, and market supply was mainly zinc ingot for delivery after traders closed positions in SHFE zinc market. Average traded prices for #0 zinc were RMB 20,430/mt in the week of January 11th -15th, down 2.0% on a weekly basis.
Last week, LME tin prices fluctuated widely affected by negative news and positive news from China and the US, but LME nickel prices were still on upward track and set a new high at USD 18,500/mt from the level of USD 17,400/mt at the beginning of last week, showing robust momentum. LME tin inventories grew slightly by more than 27 kt.
Inspired by tin prices in LME nickel market, tin prices in the Shanghai market quickly advanced by RMB 10,000/mt within last week. On the first two days of last weak, traders also raised their offers actively, which helped stimulate a small amount of stock replenishment from end-users. However, when tin prices rose above RMB 135,000/mt, trading volumes began to wane and wait-and-see sentiment expanded in the market. Some downstream consumers made purchase cautiously for the fear of risks when prices at high levels while traders were reluctant to move goods for the expectation of price increases, which helped tighten supply of goods in the market. In addition, upstream producers raised prices again to RMB 145,000/mt in virtue of overhauling and difficulty in replenishing raw materials, but they were a little bit hesitant to raise offers higher since downstream consumers adopted a wait-and-see attitude. It is expected that rising room for tin prices will be smaller in the week from January 18th to January 22nd.
The price spread between foreign and domestic markets narrowed gradually as LME nickel prices fell, with limited volumes of imported goods flowing into China's domestic markets over the past week as a result. This helped increase market supply, and trading sentiment was reported to be brisk as well. On January 13th, Jinchuan Group cut nickel ex-works prices by RMB 4,000/mt, to RMB 139,000/mt, creating an opportunity for purchasing at lower prices, resulting in strong trading activity. Traded prices for imported nickel were in the RMB 139,000-141,000/mt range, while traded prices for goods from Jinchuan Group were between RMB 139,500-142,500/mt in the week of January 11th -15th.
According to the latest data, stainless steel inventories were 185.4 kt in Wuxi, up 1.7 kt. Stainless steel inventories grew again, exerting heavy pressure on market prices. In the week of January 11th -15th, opening prices for #304 stainless steel quoted by steel mills were unchanged from a week earlier, but stainless steel market prices were lower, affected by LME nickel price declines on Wednesday, and with trading volumes reporting no growth. Most buyers adopted a wait-and-see attitude, with plans to purchase once the stainless steel market stabilizes. The range of production planned by China's six major steel mills is between 7.1 and 8.0 million mt in 2010, including output from Taigang Stainless Steel Company, Baosteel Stainless Steel Branch, Lianzhong Stainless Steel Corporation, Zhangjiagang Pohang Stainless Steel Company, Jiuquan I/S Stainless Steel Branch, and Shandong Taishan Steel Group Stainless Steel Branch. However, whether or not these production targets are met will depend on construction of new capacity at those steel mills, and the strength of the stainless steel market.
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