SHANGHAI, June 7 (SMM) -- Fitch Ratings cut Spain's credit rating, triggering another round of declines in base metals prices. Later, the weaker-than-expected economic data including the PMI, consumer confidence index, and consumer spending in the US, as well as China's PMI also caused base metals prices to weaken. Last week (May 31-June 4), SMMI slumped by 4.74%, with SMMI.Ni and SMMI.Zn down 11% and 9.06%, respectively. The European sovereign debt crisis weighed down the euro, and the strengthening US dollar remains the major reason to hamper base metals prices from rebounding. Metals prices lacked upward momentum recently, with the pessimism dominating the market.
Over the past week, SHFE September delivery copper contracts, the most active in the SHFE market, fell back on Wednesday to a weekly low of RMB 52,520/mt and down 6.2%, from a high of RMB 56,050/mt, but less than the 6.7% of LME copper prices.
In the spot market, premiums advanced due to falling SHFE copper prices, but only rising to positive RMB 300/mt on Wednesday as SHFE copper prices fell sharply. Major domestic copper smelters maintained normal production, with high operating rates. However, the SHFE/LME copper price ratio moved around 8.0, even briefly falling below 8.0 on Thursday, reducing supply of imported copper. Transactions for domestic high-quality copper were brisk, with strong offers. Operating rates at downstream producers were stable, helping strength demand for copper. Continuing decline in copper prices increased bargain hunting, resulting in brisk trading sentiment in the weekend.
SMM expects copper prices will experience a new round of corrections in the coming week. At present, LME copper prices have fallen below the 5 and 10-day moving average, falling back to around USD 6,600/mt. SMM believes copper prices will be closely linked to major economic data due for release next week.
The US will announce non-farm employment data and the latest unemployment rate on Friday evening. If non-farm employment is positive as expected, LME copper prices will likely find support. However, if the US dollar index remains strong, any upward momentum for LME copper prices will be limited. In addition, China will release CPI data for May in the coming week, with markets generally expecting a result of 3% or slightly higher. Inflationary pressure will also add to market fears of higher interest rates, which will leave financial markets exposed.
In this context, SMM predicts LME copper prices to fluctuate between USD 6,500-6,700/mt next week.
SHFE three-month aluminum contract prices also moved lower, with prices testing the previous low of RMB 14,700/mt after falling below RMB 15,000/mt. Downstream consumer welcomed lower aluminum prices, increasing overall transactions in spot markets compared to the previous two weeks.
Any support in domestic aluminum markets for aluminum prices due to rising costs has faded. Market concerns are now focused on sustainability of the strong growth of China's economy given recent uncertainty surrounding future demand from end-users. Both the real estate and automobile markets have shown signs of weakening during 1H 2010, and coupled with expectations of steady growth in aluminum capacity, domestic aluminum market fundamentals will remain weak for the foreseeable future.
The LME aluminum market outperformed domestic markets, but whether or not higher crude oil prices will boost LME aluminum prices is unknown, although steady declines in LME aluminum inventories and growing positions are positive signals for market players. In general, gains in aluminum prices are still below other base metals, and conditions of strong LME and weak SHFE aluminum markets remain unchanged. SMM predicts LME aluminum prices will fluctuate around USD 2,000/mt in the coming week, while SHFE three-month aluminum contract prices will test the RMB 14,700/mt mark.
Earlier this past week, domestic lead prices stood above RMB 14,600/mt, but fell below RMB 14,500/mt on Wednesday as LME lead prices tumbled. On Friday, domestic lead prices dropped to around RMB 14,200/mt. As a result, domestic lead producers failed to maintain the RMB 15,000/mt price level, but were still reluctant to move goods at low levels. Downstream producers and traders stayed out of the market amid a strong pessimistic sentiment, generating low buying interest, and keeping overall trading sentiment quiet.
In viewed of depressed prices and sales in recent days, some domestic lead producers chose to conduct unit maintenance. However, whether or not reductions in supply from production cuts will support prices remains to be seen, given high spot inventories, and a traditional low demand period at present.
Domestic zinc prices were weak as well. Spot zinc prices failed to find support at RMB 15,000/mt, and SHFE zinc prices even declined to daily price limits on Wednesday and Friday, causing market sentiment to turn negative. However, downstream consumers only purchased on an as-needed basis despite of growing market pessimism and falling zinc prices. Market buying increased on Friday when zinc prices fell below RMB 14,500/mt, but downstream consumers generally preferred to adopt a cautious and wait-and-see attitude.
Average traded prices for #0 zinc were RMB 15,130/mt in Shanghai market over the past week, down RMB 380/mt from a week earlier, and traded prices for #0 zinc set a weekly low of RMB 14,350/mt on Friday. In other news, it is worth noting that trading volumes and positions of SHFE 1009 zinc contract increased sharply, with intraday trading volumes even reaching as high as 2.7 million lots on Thursday, a new high. The brisk SHFE zinc market was attributed to increasing short-term transactions and growing speculative funds who enter zinc market with the aim of taking short-term profits.
Smelters were reluctant to move goods amid falling zinc prices, with market supplies mainly goods held by traders previously for hedge. In other news, a number of smelters have begun to cut production or conducted unit maintenance ahead of schedule since mid-May in attempt to ease their cash and inventory pressure. SMM believes domestic supply of zinc ingot will decline over next three months if zinc prices continue to move below RMB 15,000/mt.
In the Shanghai tin spot market, downstream consumers continued to adopt a wait-and-see attitude and only made purchases on an as-needed basis, resulting in extremely sluggish transactions, under the context of weak LME tin prices. Purchasing interest from traders was not strong given the current thin profit, as smelters still quoted firm offers. In addition, with bearish sentiment dominating the market, a slight price decline shall only have limited effect on boosting transactions. Traders hold limited goods, mainly unknown brand tin.
As of last Friday, mainstream traded prices of major brand tin were between RMB 141,500-142,000/mt, and mainstream traded prices of unknown brand tin were between RMB 140,000-140,500/mt. Dampened by many unfavorable macro conditions, LME tin prices may have difficulty in making any breakthroughs, and market is still dominated by strong bearish sentiment. Although domestic major brand tin smelters kept offers firm, unknown brand tin smellers cut theirs offers to RMB 141,500/mt. Any room for prices to fall significantly is limited due to little supply of goods, but upward momentum for prices to move up is also very weak.
Due to poor economic data from the EU and US markets, as well as from concern over weaker base metal demand from China, LME nickel prices fell sharply last week, the sixth consecutive month of declines, and falling below the important support level of USD 20,000/mt.
Even though LME nickel prices declined steadily, Jinchuan Group left its ex-works prices unchanged. As overseas nickel prices fell sharply, the domestic/LME nickel price ratio in China became positive, resulting in an increasing supply of imported nickel. Domestic spot prices also later followed falling LME nickel, with spot prices falling from RMB 170,000/mt, to 162,000/mt. The price spread between Jinchuan Group and imported nickel expanded, but trading sentiment was not strong given the steep price decline. When prices rebounded on Thursday, transactions were slightly more active, with improved purchasing sentiment at purchasers.
According to latest statistics, total inventories at 26 warehouses in Wuxi stainless steel market were 251.6kt, up 1.6%, including 24.7kt of #200 stainless steel, 192.7kt of #300 stainless steel and 34.2kt of #400 stainless steel. Stainless steel spot market is still under great pressure.
Last week, stainless steel mills continued to cut prices sharply since lower nickel prices are failing to support current price levels. Some stainless steel mills conducted annual maintenance in advance or conducted small scale system repairs under the context that demand and prices of stainless steel were both sluggish, further reducing output of stainless steel. However, large-scale production cuts expected in June did not materialize since most large scale stainless steel mills did not want to be first to cut stainless steel output. However, SMM believes demand for stainless steel will be sluggish for the foreseeable future and recent poor economic news will also cause nickel prices to fall further.
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