SHANGHAI, June 28 (SMM) -- China's Central Bank decided to proceed further with the reform of RMB exchange rate mechanisms to make yuan more flexiable in accordance with domestic and overseas economic and financial conditions, as well as China's international balance of payments. Financial markets showed immediate response to China's yuan move, and China's currency yuan surged by 286 basis points versus the US dollar on June 21st, and even hit the daily upside limits. China's domestic A-shares market and commodity market rebounded on June 21st as well. The Federal Reserve (Fed) pledged to hold benchmark interest rates at 0-0.25% for an extended period on its two-day interest rate policy meeting on June 23rd, which was in line with market expectations.
Last week, SMMI surged by 2.69% buoyed by China's yuan move and the Fed's interest rate decision. Zinc prices led base metals prices increases, with SMMI.Zn soaring by 5%, and trading volumes even set new highs consecutively in the SHFE zinc market. Lead and copper prices followed suit, with SMMI.Pb and SMMI.Cu rising by 3.36% and 2.69%, respectively. China's State Council has approved the elimination of export tax rebates on 406 products, effective July 15th, including some steel, and nonferrous metal products, a signal of China's Central Government's intention to accelerate the industrial structure adjustment. However, there is high likelihood profit margins at some export-oriented enterprises will tumble for the foreseeable future.
SHFE copper prices outperformed LME copper due to support from strong long positions. SHFE copper prices rallied to its daily limit in afternoon trading on Monday when the news of China's RMB reform measures was announced. Over the next few days, SHFE copper prices were still able to move up despite weak performance of LME copper prices. The number of positions for SHFE copper increased dramatically, and trading sentiment was brisk.
Supply of domestic copper tightened, especially for standard-quality domestic copper, which was affected by unit maintenance at some smelters and by the unwillingness of other producers to move goods. Shortages of imported copper also resulted in limited supply of imported goods even though the SHFE/LME copper price ratio was favorable for imports. Market supply fell and spot premiums remained around positive RMB 200/mt.
Downstream producers reported normal orders, with no significant impact felt from the seasonal low demand period. However, frequent daily fluctuations made downstream producers wary of purchases, resulting in lackluster trading sentiment.
It is worth noting that premiums for imported copper increased further. Offers for hydro-copper were made at premiums of USD 90-100/mt, pyrometallurgy copper at USD 110-130/mt, with some offers heard as high as USD 150/mt. High premiums for imported copper were due mainly to growing expectations of a revaluation of the RMB, which would likely increase China's imports of copper. In this context, cargo-holders held goods back, leaving market supply limited, and this will likely further push up premiums for imported goods.
G-20 Summit will be held 26-27 June, and comments by leaders about the economy during the meeting, as well as the results of the meeting, will certainly affect global financial markets. At present, LME copper prices have solid support at USD 6,500/mt after the latest round of price gains in response to the RMB reform news. Strong performance in the SHFE copper market, driven by strong cash flows, will also help support LME copper prices.
In this context, SMM believes LME copper prices will fluctuate in the USD 6,500-6,700/mt range next week.
LME aluminum prices climbed slightly during the Chinese Dragon Boat Festival holiday in mid-June, but SHFE aluminum prices were weaker after the holiday. China's Central Bank announced new reforms of the RMB exchange rate, raising market expectations of inflation in China. SHFE base metals prices edged higher, led by SHFE zinc prices, as a result of the RMB reform news, with SHFE aluminum prices also remaining above the 5-day moving average.
Aluminum producers delayed planned production cuts in view of rebounding aluminum prices following the Chinese Dragon Boat Festival holiday, and as different industrial sectors enter the summer low demand period. Continued declines in LME aluminum inventories are also unknown. China's move to reform its currency exchange value is a positive factor for base metals and financial markets in the short term, with SMM predicting aluminum prices will temporarily ignore any changes in market fundamentals and will rise over the short term. In general, SMM predicts LME aluminum prices will attempt to break through the USD 2,000/mt resistance level in the coming week, while SHFE three-month aluminum contract prices will test the RMB 15,000/mt mark.
Domestic lead prices followed rising trends of LME lead prices over the past week, rallying from RMB 14,400/mt earlier in the week to RMB 14,900/mt in late week. However, downstream purchasing interest was brisk only in earlier week, and buying activity waned when prices approached RMB 15,000/mt. Domestic lead producer interest in moving goods improved when prices were closer to RMB 15,000/mt. If market supply returns ample, domestic lead prices will come under pressure to move higher.
The seasonal low demand period for zinc in China is approaching, but new record highs in trading volumes were set every day last week in the SHFE zinc market. Zinc prices were being buoyed by speculative funds, and speculative buying helped SHFE 1009 zinc contract prices close at RMB 14,900/mt last Friday (June 25th), up 6.76% compared with a week earlier. Positions of SHFE 1009 zinc contract declined by 61,000 lots to 230,000 lots, and positions of SHFE 1010 zinc contract increased gradually. Total trading volumes reached a record high of 3.46 million lots last Wednesday supported by speculative buying, with the trading value exceeding RMB 250 billion.
In the spot market, downstream buying interest was relatively lower amid rapidly rising zinc prices, and market sentiment was very bearish, especially on Monday and Wednesday. In other news, market consumption was pessimism based on actual orders from downstream producers. Operating rates at zinc die casting alloy producers declined. In addition, operation at galvanizing industry, the largest user of zinc, remained stable compared with May levels, but was relatively sluggish on a yearly basis.
Average traded prices for #0 zinc were RMB 14,842/mt in Shanghai market over the past week, up RMB 1,074/mt from pre-holiday levels, or up 7.8%. SHFE zinc inventories declined by 2,897 mt last week since supplies of spot zinc by smelters were limited, with volumes of warrants falling by 21 kt to 148 kt. Transactions of warrants were mainly made in the marekt, with speculation gaining signficantly.
Domestic tin smelters gradually lifted offers early last week along with price increases of LME tin prices, and traders also tentatively lifted prices of tin from Yunnan Tin group at RMB 141,000/mt. However, downstream acceptance towards high-priced goods was not high, and consumers preferred to accept prices below RMB 140,000/mt. Some traders had no choice but to lower offers slightly given the current sluggish transactions. Mainstream traded prices of major brand tin were between RMB 139,000-140,500/mt, and mainstream traded prices of unknown brand tin were between RMB 138,500-139,000/mt.
As recent tin prices fluctuated, downstream companies mostly made purchases on an as-needed basis. Since LME tin prices still fluctuated without clear direction and macro economic news were unfavorable, most market players were pessimistic toward tin prices in the short term, resulting in relatively sluggish transaction in spot market. Profit margin for traders was tin due to firm offers from smelters, so supply of goods was relatively limited in the market.
Smelters kept offers firm due to high tin ore prices, so they were reluctant to move goods when prices were low. However, downstream consumers adopted wait-and-see attitude with short position sentiment, resulting in stagnant sentiment between the two parties. As macro trend was not clear and fundamentals' lacked support, possibility for LME tin prices remain its fluctuation trend was high. It is expected that spot prices will remain largely stable in the following week.
LME nickel prices were relatively stable and moved weakly between USD 19,300-20,300/mt. Although prices were temporarily boosted from news of RMB exchange rate reforms, poor market fundamentals and unfavorable factors overshadowed that news. Later, the State Administration of Taxation announced on June 22nd that China will eliminate export tax rebates on 406 commodities, effective June 15th. Although stainless steel products were temporarily not included in this latest list of affected products, the loss of export tax rebates for plain carbon steel may indirectly exert a negative impact on stainless steel production in the future.
Ex-works nickel prices from Jinchuan Group were RMB 153,000/mt, and spot prices were hovering near this level, between RMB 154,000-155,500/mt. Prices fluctuated narrowly and profit margins for traders were thin. Since most traders were not optimistic towards future nickel prices even as nickel prices rose, trading sentiment remained sluggish. Downstream buyers were cautious, keeping raw material inventory levels low.
According to the latest statistics, inventories at 26 warehouses within the Wuxi stainless steel market were 243.9kt, down 4.2%, and included 18.5kt of #200 stainless steel, 196kt of #300 stainless steel, and 29.5kt of #400 stainless steel. The drop in inventories was mainly from #200 and #400 stainless steel, as inventories for #300 stainless steel were both slightly higher. .
Ex-works prices from Taigang Stainless Steel for #304 cold-rolled, #304 hot-rolled, and #430 stainless steel were down RMB 1,000/mt, RMB 300/mt, and RMB 1,300/mt respectively. Currently, prices are RMB 21,620/mt for #304 cold-rolled stainless coil and RMB 20,820/mt for #304 hot-rolled stainless coil, while prices are RMB 11,120/mt for #430 cold-rolled stainless coil. Prices from Lianzhong Stainless Steel Corporation for #304 cold-rolled stainless steel were down by RMB 400/mt, to RMB 20,800/mt, and prices for #304 hot-rolled stainless steel were down by RMB 100/mt, to RMB 19,600/mt. Prices for #201 stainless steel were unchanged, and benchmark prices for #201 cold-rolled stainless steel were found at RMB 12,250/mt. Benchmark prices of #430 hot-rolled stainless steel were down by RMB 300/mt, to RMB 9,100/mt. July offers for #304/2B stainless steel from Baosteel were down by RMB 1,000/mt, to RMB 21,000/mt, and were down by RMB 1,000/mt, to RMB 10,600/mt, for #430/2B stainless steel. Prices were down by RMB 800/mt, to RMB 20,400/mt, for #304 NO.1 stainless steel.
Stainless steel markets will continue to be sluggish with the onset of the seasonal low-demand period. The State Administration of Taxation announced on June 22nd that China will eliminate export rebate taxes on some products. Although stainless steel products were not included in this latest list of affected products, the loss of export tax rebates for plain carbon steel may indirectly exert a negative impact on stainless steel production in the future.
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