SHANGHAI, Nov. 1 (SMM) -- The US dollar index rebounded last week, with the index even climbing to as high as 78.273 and ending the continuous rally since October. In response, all base metals prices experienced significant declines. Last week, the SMMI fell by 1.17%, and zinc prices led base metals prices declines, with SMMI.Zn falling by 3.66%, and spot prices for #0 zinc fell back to below RMB 20,000/mt. Lead prices were firm, with SMMI.Pb rising slightly by 1.13%.
Market players are focused on the US Federal Reserve (Fed) interest rate meeting scheduled for early November, and market expectations that the Fed will implement the quantitative easing policy remain strong, but if the scale of additional issuance of government bonds is small, the US dollar index will rebound. In this context, the US dollar index is expected to move between 77-78 in the short term ahead of the Fed meeting, and domestic base metals prices will undergo corrections in response.
SHFE copper market prices were slow to fall over the past week, helping the SHFE/LME copper price ratio improve. SHFE 1102 copper contracts, the most active, found support at RMB 63,500/mt, but met resistance at RMB 64,000/mt. China's Shanghai Stock Exchange Composite Index was moving around the 3,000 point level, while in the SHFE copper market there were signs of cash withdrawals from the market. Both longs and shorts took a cautious attitude. Last week, spot copper prices advanced close to RMB 64,000/mt, along with rising SHFE copper prices. Spot discounts expanded in response, reaching negative 500-700/mt on Tuesday, growing from negative RMB 300/mt on Monday, and a reflection of weak demand and ample supply.
Slight rebounds in the US dollar index, coupled with weak spot consumption, have for the moment curbed upward momentum of copper prices despite market expectations copper prices will remain strong in the long term due to inflation expectations. SMM believes LME copper market will move at around USD 8,300/mt in the coming week after finding support at USD 8,180/mt, while SHFE copper prices will find support at RMB 62,500/mt range, with limited downward room.
SHFE three-month aluminum contract prices fell steadily after initially surging to RMB 16,900/mt on Monday. Later, China's futures exchanges introduced a series of trading rules to curb excessive speculation, dragging down domestic base metals prices, with SHFE three-month aluminum contract prices falling to RMB 16,400/mt as a result. Although investors were cautious due to steady declines in aluminum prices, aluminum market fundamentals remain bullish and the Shanghai Stock Exchange composite index again rose to 3,000 points. In this context, SMM predicts any declines in SHFE aluminum prices will be limited, with prices expected to find support from strong buying at lower prices.
As spot discounts expanded to RMB 200/mt last week, traders showed strong interest in purchases due to optimism toward the future market outlook. However, downstream processors showed low buying interest, keeping overall market sentiment neutral.
Last week, prices in China's lead spot market kept firm. Coupled with price gains in the LME lead market, prices in China's lead spot market rose to RMB 17,800/mt in mid-week from early week's RMB 17,450/mt. However, downstream producers were unwilling to accept the higher lead prices, only passively purchasing on an as-needed basis. Despite lower supply from electricity restrictions in Henan province, upstream lead smelters improved their selling interest in view of constantly rising lead spot prices until mid-week. Since last week was the end of October, traders cut offers to RMB 17,500/mt amid falling LME lead prices in order to generate cash. The move to cut offer provided an opportunity of bargain-hunting for some traders with abundant capital, leading to brisk transactions in the weekend.
At the beginning of last week, SHFE zinc prices rose consecutively in tandem with rising LME zinc prices, with SHFE 1102 zinc contract prices once surging from RMB 20,500/mt to RMB 21,785/mt. However, SHFE 1102 zinc contract prices then fell on Wednesday and Thursday, dragged down by LME zinc prices, sinking to RMB 20,500/mt.
In spot markets, zinc prices were also affected by wild fluctuations in SHFE zinc prices. Zinc spot prices hit a high of RMB 20,700/mt, and spot discounts expanded from the previous week's RMB 800/mt, to hit RMB 1,000/mt, bringing more arbitrage opportunities from the gap between SHFE zinc and spot zinc prices. Downstream buyers considered high prices unacceptable, but traders closed a large number of deals, resulting in the unavailability of registered zinc in spot markets. As SHFE zinc prices tumbled, zinc spot prices fell to between RMB 19,600-19,800/mt, and downstream buyers began to purchase modestly at lower prices.
Total zinc inventories were 550 kt last week, unchanged from a week earlier. Spot zinc prices fluctuated widely last week, and downstream producers made only limited purchases at current high prices. Most deals were made by traders for arbitrage reasons, since spot discounts remained between RMB 800-900/mt, even expanding to RMB 1,000/mt. As a result, total inventories remained unchanged.
Domestic tin spot prices slipped at stable pace last week. Supply of major brand tin was limited, and overall trading sentiment was relatively quiet. Transactions were only relatively brisk last Monday following LME tin price surge in the afternoon trading session. LME tin prices stagnated later, intensifying wait-and-see sentiment in domestic market and failing to boost domestic tin prices to rise further. The stable domestic tin prices are due to support from limited market supply, as smelters were reluctant to move goods given the unit maintenance, supporting tin prices to certain extent. Yunnan Tin group resumed to offer quotes, with prices at RMB 165,000/mt reported, but only allowed transactions at small volumes. Mainstream traded prices of tin from Yunnan Tin group were around RMB 159,000/mt and mainstream traded prices of unknown brand tin were between RMB 157,500-158,000/mt. SMM believes that domestic tin prices may have difficulty in making breakthrough in the following week under the expiation of volatile LME tin prices.
LME nickel prices rallied early but later fell back last week due the lack of clear trends for the US dollar index. A pledge by G20 finance ministers over the weekend to refrain from currency devaluations led to more dollar selling on Monday, sending base metal prices up across the board. LME nickel prices surged to USD 23,565/mt, but when the US dollar index rebounded slightly last Wednesday, base metal prices fell sharply and LME nickel prices fell as low as USD 22,750/mt. Nickel prices in the Shanghai spot market fell to near RMB 177,500/mt last week. Purchase volumes from downstream consumers continued to fall due to weaker downstream consumption and a strong wait-and-see sentiment following LME nickel price declines. However, bargain hunting by traders increased as nickel prices fell. Last week, mainstream traded prices of nickel from Jinchuan Group were between RMB 180,000-180,500/mt and mainstream traded prices of nickel from Russia were between RMB 177,500-180,000/mt.
According to the most recent statistics, total inventories were 201.2 kt at 26 warehouses in the Wuxi stainless steel market, down 5.8% on a weekly basis, and include 26.7 kt of #200 stainless steel, 156.2 kt of #300 stainless steel, and 18.3 kt of #400 stainless steel.
Settlement prices from Taigang Stainless Steel were unchanged from a week earlier. Prices were RMB 24,620/mt for #304 cold-rolled stainless steel coil, RMB 23,820/mt for #304 hot-rolled coil, and RMB 11,820/mt for #430 cold-rolled coil. The stainless steel trading market was lackluster as usual. The reasons are as follows. First, weighed by high inventories, the expected peak demand period in September and October never materialized. Second, the major clients of traders are small private companies, whose demand is limited due to their limited power and insufficient government support. Third, large companies prefer to make purchase directly from steel mills instead of from traders, also contributing to a quiet trading market. According to related statistics, China's output of stainless steel in 2010 will surpass levels from 2009, an indication of positive demand, especially from export markets, which was greatly improved from a year earlier. With regard to stainless steel prices, recent prices will largely remain stable due to recent nickel price corrections.
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