SMM Weekly Review and Forecast (July 12-16)

SHANGHAI, July 19 (SMM) -- China's National Bureau of Statistics released macro economic data for 1H 2010 on July 15th. China's GDP still maintained a double-digit growth in 1H 2010 despite of strict curbs on property markets and tough process of structure transformation. Figures released by the US Commerce Department on July 13th show that the US is still under huge pressure from trade and budget deficits, which will definitely exert negative impact on base metals prices in the long term. Base metals prices still fluctuated within a narrow band, and SMMI slipped by 0.34% last week, with SMMI.Cu and SMMI.Zn falling by 0.6% and 0.33%, respectively. SMM believes the improving Investors' risk appetite and positive June macro economic data from China will help support base metals prices to some extent in the short term.    

Copper:
Copper supply in domestic spot markets tightened as a result of unit maintenance at copper smelters, lower imports of copper, and unwillingness by suppliers to move goods before the delivery date. First, unit maintenance at domestic copper smelters reduced supply of domestic copper, especially domestic standard-quality copper. Supply shortages and firm prices resulted in narrowing price gap between domestic standard-quality and high-quality copper. Second, supply of imported copper remains tight, and suppliers of imported copper showed little enthusiasm to sell goods in view of the falling SHFE/LME copper price ratio.  Third, following the approach of a new contract month, cargo-holders preferred to deliver goods as spot discounts emerged on Thursday, further reducing market supply.

Market supply was tight, but demand was down during the seasonal low demand period, and resistance was strong for prices near RMB 54000/mt. Downstream producers generally stood on the sidelines, leaving trading volumes down on a weekly basis. 

SMM believes that copper prices will continue to fluctuate in the coming week. First, US companies will continue to release earnings reports and will continue to affect US stock markets. Over the past week, Aluminum Company of America (Alcoa) and other large corporations announced better-than-expected earnings, and the positive impact on US stocks is expected to continue. The US dollar has remained weak for almost two weeks, ever since focused less on debt issues in Europe and more toward the pace of economic recovery in the US, sending the US dollar index below 83. Without positive news, the US dollar will remain soft in the coming week. In China's domestic markets, supply and demand is coming more into balance, and SMM believes LME copper prices will fluctuate in the USD 6,600-6,800/mt range, if no solid economic news is available.

Aluminum:
Conditions of strong LME and weak SHFE aluminum prices continued last week, and SHFE aluminum prices fell nearly RMB 200/mt early last week, driven down by other base metals prices. However, SHFE aluminum prices rebounded later, but with prices still below the 5-day moving average and failing to break through the RMB 15,000/mt mark. Weak SHFE aluminum prices also dampened spot markets. Buying interest was bearish early last week, with overall trading sentiment lackluster. Thursday July 15th was the last trading day of SHFE 1007 aluminum contracts, and downstream inquiries were up before the delivery date in an effort to make purchases at lower prices.

Technical indicators in the SHFE aluminum market show the lack of clear market direction, and as a result, SHFE aluminum prices are reacting to macro-economic news and other base metals prices trends.  Meanwhile, China's market fundamentals have not improved significantly, and a number of downstream fabricators are closed due to high summer temperatures, which will affect the short-term consumption. In general, SMM predicts SHFE 1010 aluminum contract prices will continue to fluctuate in a narrow band after transitioning into a new contract month, but before SHFE 1010 aluminum contract prices are able to break through the RMB 15,000/mt resistance level.

Lead:
Domestic lead prices generally on an upward track over the past week, but with a slower pace. Domestic lead producer unwillingness to move goods limited downward room for lead prices. Domestic lead prices fell to RMB 14,700/mt on Tuesday due to falling LME lead prices on Monday, and later prices edged up, with deals made at around RMB 14,900/mt on Friday. However, weak transactions left domestic lead prices under pressure at RMB 15,000/mt. In addition, downstream producers became cautious in terms of purchases when prices strengthened, a sign of their preference towards low-priced goods.

Zinc:
China Customs released data for June imports and exports of copper and aluminum, with both falling and triggering market concerns over Chinese demand. As a result, SHFE zinc prices began to slip on Monday, with prices even falling below RMB 15,000/mt. Although positive June macro economic data from China helped SHFE zinc prices advance rapdily and trim previous losses, zinc prices still lacked upward momentum, depressed by weak spot markets, and with prices mainly moving around RMB 15,000/mt over the past week. Trading volumes continued to remain relatively low, an indication of stronger wait-and-see sentiment. Average trading volumes were 1.79 million lots last week, down 296,000 lots from a week earlier, while positions of SHFE three-month zinc contract remained around 290,000 lots.

Spot market improved last week, which is directly linked to a lower zinc price below RMB 15,000/mt. Market players believe any increases or declines in zinc prices will be limited. In this context, downstream buying interest improved when zinc prices fell to RMB 14,800/mt last week. average traded prices for #0 zinc were RMB 15,005/mt in Shanghai last week, down RMB 87/mt from a week earlier.

According to figures from China's National Bureau of Statistics, China's zinc output was 425 kt duirng June, down 5.8% MoM, with YTD output of 2.477 million mt, up 31.1% YoY. China's output of zinc concentrate was 400 kt during June, up 17.6% MoM, with YTD output of 1.795 million mt, up 40.8% YoY. Output of zinc and zinc concentrate both experienced significant year-on-year growth for two reasons. First, enterprises maintained normal opertions in 1H 2010, as average zinc prices in 1H were much higher than the same period of 2009. Second, the low base of comparison in 2009 also contributed to the high year-on-year growth. According to SMM sources, zinc smelters generally conducted unit maintenance or cut production as zinc prices fell rapidly since May, so SMM predicts China's zinc output will likely fall in July. 

Tin:
Tin smelters lifted prices last week (July 12-16) when LME tin prices fluctuated upward, and current mainstream ex-works prices from major brand tin smelters are above RMB 139,000/mt. In the Shanghai tin spot market, prices climbed at a stable pace, but transactions were still sluggish. Up to last Friday, mainstream traded prices of tin from Yunnan Tin group and Yunnan Gejiu Zili Metallurgy Co., Ltd were between RMB 139,000-139,500/mt and traded prices of unknown brand tin were between RMB 138,500/mt. Demand for tin ingot was reducing amid seasonal low-demand period, resulting in sluggish trading sentiment in the market.

Supply of goods was still limited in the market last week. The sluggish market demand and tin profit helped raise traders' awareness of risk aversion, resulting in cautious stock replenishment from traders. Supply of low-priced goods is tight in the market at present, and mainstream spot prices are expected to climb to certain extent if LME tin prices don't fall significantly in the week (July 19-23). 

Nickel:
In China spot markets, transactions were sluggish. Prices for imported nickel moved between RMB 152,000-153,500/mt and prices for nickel from Jinchuan Group fluctuated around the RMB 155,500/mt mark. Overall trading sentiment was sluggish as the narrow price range and high costs erased any trader profits. Transactions were still dominated by traders, though, with few end users entering the market.

According to the latest data, total inventories of stainless steel at 26 warehouses in the Wuxi stainless steel market were 243.3kt, down 1.25%, and included 24.7kt of #200 stainless steel, 188.3kt of #300 stainless steel, and 30.7kt of #400 stainless steel.

Ex-works prices from Taigang Stainless Steel were unchanged last week, with prices at RMB 21,620/mt for #304 cold-rolled stainless steel, RMB 20,820/mt for #304 hot-rolled stainless steel, and RMB 11,120/mt for #430 cold-rolled stainless steel.

New policies for China's real estate industry, as well as greater government efforts to eliminate outdated or inefficient capacity are having a significant impact on China's iron and steel industry. Prices for plain carbon steel have fallen for two straight months, and traders are concerned whether or not lower plain carbon steel prices will drag down stainless steel prices, and this uncertainly has kept stainless steel prices stagnant. In addition, LME nickel prices have been fluctuating weakly recently, and this lack of a clear nickel price trend is another reason behind the stagnant stainless steel market. Market is waiting for a clearer price direction.       

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