SHANGHAI, Sept. 19 (SMM) -- China's National Bureau of Statistics released major economic data for August on September 11th. China's consumer price index (CPI) rose by 3.5% in August, again exceeding the target of keeping the full-year inflation rate at 3% set by China's Central Government for 2010. Meanwhile, China's central bank released on September 11th that China's new yuan loans in August were RMB 545.2 billion, while China's broad money supply (M2) increased significantly at the end of August compared with July levels, and the YoY growth rate of M2 has ended the eight-month declines, which may intensify market concerns over higher prices as a result of excess liquidity and will in turn increase pressure faced by China's central bank to tighten money supply. Market rumors concerning possible interest rate hike by China's central bank in the middle of last week even caused base metals prices to fall.
SMMI moved narrowly last week, with a weekly gain of only 0.23%. Zinc prices experienced relatively larger declines, with SMMI.Zn down 0.58%. China's currency set new highs every day last week since China's Central Government implemented exchange rate reform, with China's yuan advancing to RMB 6.7181 per US dollar. The continuous yuan appreciation will not only exert pressure on exporters, but also cause the inflow of hot money, which will in turn push up property and commodity prices in the future.
Compared to LME copper prices, SHFE copper prices were weaker. Falling stocks markets in China and stronger short positions pushed SHFE copper prices down near RMB 58,500/mt on several occasions, keeping the SHFE/LME price ratio at around 7.8. Spot discounts remained last week. Earlier in the week, domestic copper smelters reduced sales as spot discounts neared negative 100/mt. In addition, the low SHFE/LME copper price ratio continued to depress imports, leaving no significant increases in market supply. Restrictions on electricity supply in Jiangsu and Zhejiang provinces are still in place.
In the coming week, there will be only two trading days in China due to the Mid-Autumn Festival. China's domestic stock markets have been depressed recently by the failure of the Agricultural Bank's stock price to remain above the IPO price and from concerns over the possibility of higher interest rates. Given this pessimistic sentiment, SMM believes SHFE copper prices will continue to fluctuate around RMB 59,000-60,000/mt in the coming week.
While the SHFE copper market is closed for the holiday, the LME copper market will be closely linked to economic news. SMM believes that LME copper prices will unlikely make any sharp gains while the SHFE copper market is closed, given market worries over possible tighter monetary policy in China. SMM expects LME copper prices to fluctuate between USD 7,500-7,800/mt next week.
Contrary to LME aluminum prices, SHFE aluminum prices closed lower over four consecutive trading days due to weak domestic financial markets, with SHFE 1012 aluminum contract prices falling to near RMB 15,600/mt. Unexpected price declines on September 9th depressed recent long position momentum. Meanwhile, trading sentiment was very sluggish ahead of the upcoming holidays, and SHFE aluminum prices will not likely increase without focus from speculative funds. In this context, SMM predicts SHFE aluminum prices will continue to fluctuate in a narrow band in the short term.
Spot aluminum prices in east China followed SHFE aluminum prices down, but traders kept offers firm. Downstream producers stood on the sidelines early last week, resulting in lackluster trading. However, spot discounts widened rapidly to between RMB 160-180/mt on Thursday after the delivery date of SHFE 1009 aluminum contract arrived, stimulating purchasing interest of some buyers. Although most deals were made at the low-end of price range, overall market sentiment improved slightly.
Transactions in domestic lead markets improved earlier in the week, stimulated by rising LME lead prices, but later fell back from weakening LME lead prices. Currently, market trading sentiment came to a stall. Transactions in the Shanghai market over the past week were made between RMB 16,300-16,450/mt. SMM believes that market players will be wary of trading in the coming days due to the approach of the Mid-Autumn and National Day holidays, to wait for a clear market direction. Domestic lead prices will seek direction from LME lead market.
Last week, SHFE 1101 zinc contract prices fluctuated mainly between RMB 17,750-18,000/mt, gaining support from the 20-day moving average. Spot zinc prices moved between RMB 17,100-17,300/mt. Market players stayed out of the market, keeping spot transactions neutral, and with no strong signs of replenishing stocks ahead of holiday.
Total zinc stocks were 496 kt last week, up 1 kt from a week earlier. Stocks in east China grew by 1 kt due to larger delivery volumes, while stocks in south and north China remained unchanged.
The Shanghai Futures Exchange named R&S Logistics Company as a designated delivery warehouse last week. The warehouse has an approved zinc capacity of 20 kt, which will help increase the volume of zinc inventories monitored by the SHFE. The 2010 Summer Davos Forum was held in Tianjin, China last week, and local traders said some local galvanized product producers shut down operations temporarily during the event, resulting in weak demand for spot zinc over the past week. However, these producers will resume operations after the forum ends, so SMM predicts spot transactions in Tianjin will improve next week. In other news, the Guangxi provincial government implemented energy savings and emission reductions policies, with Hechi Nanfang Non-ferrous Metal Smelt Company and Liuzhou China Tin Group shutting down 1/3 of capacity in response. Since zinc ingot produced by the two smelters is mainly shipped to south China, market supply of zinc ingot in south China will be affected if Guangxi provincial government continues its power restrictions.
Last week, prices for domestic tin gradually advanced along with LME tin price surge. As of last Friday, traded prices of major brand tin were between RMB 149,000-150,000/mt and traded prices of unknown brand tin were between RMB 147,500-148,000/mt. With regard to trader, Yunnan Tin group kept offers at RMB 155,000/mt, and other brand tin smelters also lifted their offers. SMM tin prices were up by 1.4% from a week earlier, but still grew slower compared with LME tin prices, which is mainly due to sufficient supply and sluggish demand. Purchasing interest from downstream consumers was low amid price increase, resulting in moderate transactions. Tin inventories at Shanghai tin spot market were relatively low, and traders were wary of replenishing stocks in order to avoid risks. Market players largely adopted a wait-and-see attitude. Although current domestic tin demand is sluggish, strong LME tin prices will lend support for domestic tin prices. It is expected that domestic tin prices will gradual stabilize.
Last week, LME nickel prices advanced at first, but later fell back slightly. In general, the actions by all levels of government to meet energy conservation and emission reduction goals is having a negative impact on NPI production, which is in turn helping support refined nickel prices. The US dollar index weakened against the euro, and gold and equity markets rallied early last week, boosting market sentiment. In addition, macro economic data from China for August was relatively positive, also strengthening market sentiment. However, LME nickel price increases slowed last Wednesday and Thursday, along with strong US dollar index and exacerbated concern over interest rate rise at various countries.
In the Shanghai nickel spot market, transactions were down from a week earlier as prices rose slightly. Interest from downstream stainless steel mills in replenishing stocks before the holiday was low, and transactions were largely made between traders. Trading inventories in the Shanghai nickel spot market increased slightly to 12,300 mt. As of last Thursday, mainstream traded prices of nickel from Jinchuan Group were between RMB 171,500-172,000/mt, and mainstream traded prices of nickel from Russia were between RMB 170,700-171,000/mt.
As October nears, transactions for stainless steel are still relatively quiet. Current nickel prices are high, but stainless steel prices have only risen slightly, a sign that stainless steel prices are being held down by sluggish demand and high inventory levels. Although prices of certain specifications of stainless steel are high due to shortages, overall sluggish demand will continue to limit price increases. Most market participants are not optimistic towards future stainless steel prices.
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