SHANGHAI, Mar. 1(SMM) -- Economy recovery from China's downstream producers was not good, and debt crisis from Greece in Euro zone was not handled properly, with frictions with German deteriorating. In addition, favorable and unfavorable economy data from the US mixed. Initial jobless claim fro the US unexpectedly increased significantly, which triggered investors' concerns over recovery of economy in the future. Meanwhile, the government of the US paid more and more attention on the rapid increases of commodity prices caused by ample liquid in 2009, and raised discount rate by 25 basis points on February 19th, showing changed directions of monetary policies. Upward momentum of nonferrous metal prices was not strong, and SMMI dropped by 2.3% last week. SMMI.Zn dropped most by 3.0% due to lack of support from fundamentals and market funds. SMMI.AL declined slightest by 1.7%, due to relatively weaker growth during the Chinese New Year Holiday as well as weak downward momentum.
During the Chinese New Year holiday, LME copper prices surged by more than 9.4%, driven by favorable US economic data and optimism towards post-holiday consumption in China. However, post-holiday consumption in Chinese spot markets was weak, dampening the upward momentum of domestic copper prices. US economic data announced this past week was generally less positive than expected, causing LME copper prices to fall from USD 7,400/mt to within the USD 7,000-7,300/mt range.
Since some downstream producers in China have not yet resumed production, and this delay, together with rising LME copper prices during the holiday, created a strong wait-and-see attitude among buyers. Spot discounts expanded to negative RMB 450~300/mt, with weak transactions reported. Market inventories increased during the holiday period. According to SHFE, copper inventories increased by 30,325 mt over the past week. Weak spot consumption and growing stocks in Shanghai during the holiday will weigh down copper prices in the short term. However, copper prices will likely see support from actual demand expected to improve from March. According to a recent SMM survey of domestic copper plate, sheet, strip and foil producers, as high as of 82% producers told SMM that downstream orders in March will increase. In addition, March is traditionally a high demand period.
Hence, SMM believes copper prices will move in the USD 6,950-7,350/mt range in the coming week, waiting for further market direction. Particular attention should be paid to consumption in China, the progress of national debt issue in some EU countries and the economic data from the US.
SHFE aluminum prices climbed on the first trading day after the holiday, but later slipped due to the weak performance of other metals, slow pace of recovery in demand, and a significant growth in inventories. SHFE three-month aluminum contract prices soared to RMB 17,500/mt early last week, but then fell back to below RMB 17,000/mt. Most downstream fabricators will resume normal operations in March, and most enterprises preferred to stay out of the market in view of falling spot aluminum prices, resulting in lackluster trading sentiment in the spot market over the past week.
The US dollar index strengthened recently, weighing heavily on base metals prices, but LME aluminum prices should continue to move in the USD 2,050-2,150/mt range in the coming week since prices have moved very little recently and due to steady declines in LME aluminum inventories. There is little possibility domestic aluminum prices will increase next week given the continuous growth in domestic inventories and the uncertainty surrounding demand after March. SMM predicts aluminum prices will continue to fluctuate slightly, and SHFE three-month aluminum contract prices will test the support level of RMB 16,500/mt.
SHFE zinc prices opened high on the first trading day after the holiday, hitting RMB 19,550/mt, but actual domestic consumption was not as strong as the market expected. As a result, SHFE three-month zinc contract prices slipped gradually over the next few days, with weekly closing prices (February 22-26) between RMB 18,430-19,025/mt.
Spot zinc market was not bullish as expected during the first trading week after the holiday for two reasons. First, market sentiment has not fully recovered as most downstream producers will resume normal operations in March. Second, SHFE zinc prices remained weak after opening high last week, and spot zinc prices struggled at the RMB 18,000/mt mark. Although market players remained optimistic toward consumption in March, downstream producers still held a cautious attitude with regard to purchases, greatly increasing spot trading pressure. #0 zinc was traded at RMB 18,135/mt in the Shanghai market last week, up RMB 850/mt compared with pre-holiday levels, but trading volumes were limited.
Domestic zinc stocks increased significantly during the Chinese New Year holiday, with total stocks in Shanghai, Guangdong, and Tianjin reaching 430kt. In addition, spot supply of imported zinc increased sharply last week, which is related to increasing domestic imports of zinc during January and February. Average traded prices for imported zinc were RMB 18,085/mt over the past week, with goods mainly from Australia.
Domestic lead prices fell from RMB 16,400/mt after rallying to pace rising LME lead prices in earlier week, with prices dropping below RMB 16,000/mt in the weekend. Current downstream demand was low since downstream producers haven’t resumed full production, with low operating rates, and due to pre-holiday stock replenishment. Traders made some concessions in prices in order to generate cash flow, resulting in lower traded prices.
During the first half of the week, lead producers maintained prices firm at RMB 16,000/mt, and their sentiment was negatively affected in the second half of the week by falling LME lead prices and no improvement in downstream demand. As a result, some producers were not as absolute as before in prices. Currently, market players generally hope that downstream buying interest is able to pick up after production resumption from the holiday.
LME tin prices continued to rebound just like that in the Chinese New Year Holiday, and prices climbed from USD 16,000/mt to USD 17,300/mt, with current prices receiving support at USD 16,750/mt. LME inventories reduced to 24,840 mt.
In the Shanghai tin market, major tin producers were reluctant to move goods given the current tight supply as traders were unwilling to built stocks before the Chinese New Year holiday due to sluggish transactions during pre-holiday period, and as delivery of tin was negatively affected by Spring Festival travel rush. Supply of goods further tightened because some downstream companies entered market to make purchases to meet production demand caused by increases of LME tin prices, with prices moving from RMB 136,000/mt which was lifted by RMB 2,000/mt when opened after the holiday to RMB 139,000/mt. Purchasers were only become hesitant to make purchases when prices reached RMB 139,000/mt. It was reported that drought was very severe in Yunnan, and electricity power control policy may affect production at that region. In addition, raw material supply was tight as tin concentrate producers resumed production later. In this context, it is expected that upstream producers will continue keeping high offers. Although arrivals of goods will increase in the Shanghai tin market, tin prices will still move in the RMB 137,000-139,000/mt range due to increased purchasers and high costs in the following week.
Supply of domestic refined nickel was sufficient in spot markets, but the NPI market was mixed depending on specification. Sales of (1.7-1.8%) NPI were sluggish due to ample supply and low demand from downstream #200 stainless steel, while supply of (4-6%) NPI and (10 -15%) NPI was still tight from before the Chinese New Year holiday. However, more NPI producers will resume production after the Chinese New Year holiday and the current tight supply of (4-6%) NPI is expected to ease by the end of March.
Downstream demand after the Chinese New Year holiday was still coming mainly from limited purchases by large steel mill, but markets expected large volumes of purchase in early March. However, it was rumored in the market that the government will begin to control the size of loans to steel mills. Premier Wen Jiabao chaired a State Council executive meeting on February 24th to study how to implement restructuring and revitalization of key industries. It is highly emphasized that overproduction capacity in domestic steel and iron, cement, aluminum, coke, calcium carbide and other overcapacity industries should be strictly controlled. This move might exert negative impact on purchases of nickel from private steel mills.
In general, any downward room for nickel prices will be limited due to relatively stable demand, or even increased demand, and due to price support from Jinchuan Group. However, any room for nickel prices to rise will also be restricted due to tight monetary policy. In this context, spot nickel prices should move around RMB 150,000/mt. LME nickel prices fluctuated at high levels as new home sales in the US and the Consumer Confidence Index for January were both down sharply. Meanwhile, tighter market liquidity also depressed market confidence, and the lingering debt crisis in Greece is also adding to market uncertainty. In this context, LME nickel prices are expected to move at high levels in the near term. Technically, LME nickel prices were moving around the 5-day moving average line. The MACD moved slowly at high levels, the RSI was 60 and without clear direction, while KD was at 80, indicating slight overbuying. In addition, momentum indicator was weak. LME nickel prices are expected to continue moving at high levels, with prices fluctuating in the USD 20,000-21,000/mt range.
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