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SMM Daily Review - 2010/12/27 Base Metals Market
smm insight
Dec 28,2010

SHANGHAI, Dec. 28 (SMM) --
On the evening of December 25th, the People's Bank of China (PBOC) announced to raise the benchmark deposit and lending interest rates from December 26th, the second increase this year. After the interest rate hike, market concerns were eased, helping LME copper prices close up 0.52% last Friday, with strong performance before the Christmas holiday. In this context, the copper for delivery in three months in the SHFE market advanced after a low open on Monday. SHFE three-month copper contract prices fluctuated upward after a low open at RMB 68,450/mt, reaching as high as RMB 69,360/mt, and the lowest level of the trading day was RMB 68,310/mt. In the afternoon session, SHFE copper market fell back along with plunging stocks market, and finally closed at RMB 68,710/mt, up RMB 270/mt, with gains narrowing to 0.39%. Positions for SHFE 1103 contract prices were down 6,690 lots, while positions for SHFE 1104 copper contract prices were up 3,272 lots. As a whole, positions for all copper contracts in the SHFE market were down 3,402 lots, and trading volumes were down 20,864 lots, a sign of sluggish market transactions amid a strongly cautious market sentiment. Although the support for SHFE three-month copper contract prices is solid at the 10-day moving averages, the resistance at above RMB 69,250/mt is heavy. SMM believes that SHFE copper prices will fluctuate at around RMB 68,500/mt in the short term.

SHFE current-month copper contract prices moved higher after a low open, and stabilized at around RMB 68,230/mt in the morning session, and spot discounts were between negative RMB 500-400/mt at 10:30 am, except discounts were offered at negative RMB 370/mt for Guixi brand copper. Market supply was ample on Monday, and market offers were heard for all kinds of domestic copper, a sign of cargo-holder eagerness to move goods. However, downstream producers showed low buying interest due to tight cash flow at the year-end and low orders. Discounts for domestic standard-quality copper were forced to expand to negative RMB 550/mt due to no price advantages. Transactions saw no improvement till 11:00 am, and discounts for high-quality copper expanded to negative RMB 450-480/mt as a result, with traded prices approaching the traded price band of standard-quality copper. In the morning business, transactions were made in the RMB 67,700-67,950/mt range. As SHFE current-month copper contract prices fell back after advancing briefly along with falling stocks market, spot discounts for high-quality copper narrowed to around negative RMB 370/mt, while discounts for standard-quality copper stayed at around negative RMB 550/mt. Spot discounts dropped at a much slower pace compared with price declines in the SHFE copper market, but downstream purchasing interest remained low. Downstream producers generally took a wait-and-see attitude, waiting for price corrections. The LME market was closed on Monday due to the Christmas holiday, and trading sentiment is expected to remain lackluster with the approach of the New Year holiday after resuming trade. SHFE current-month copper contract prices will move around RMB 68,000/mt in the short term and spot discounts are not expected to narrow, and market transactions will not improve in the near term.

With the lack of market direction from the LME copper market, domestic market players are divided on the outlook. 50% of market players believe that copper prices will continue to advance, given recent strong performance and stock replenishment before the Chinese New Year holiday, despite of a strong US dollar. In addition, SHFE copper market represented strong performance on Monday after China's central bank lifted interest rates, and didn't tumble despite of plunging stocks market. All indicate that copper prices are able to find solid support at the low-end, and the upward momentum remains. The rest of market players believe that copper prices will experience corrections at high levels. The interest rate hike by China's central bank on Saturday was surprising, and the hike shows the government's determination to contain the inflation. In addition, the Chinese Premier also voiced the government's resolution to control housing prices. All these will likely depress demand for copper. Furthermore, tightening credit at the year-end will also negatively affect copper prices. However, any price declines will be limited, given the supply-side factor, optimistic outlook for demand in 2011, and inflation expectations. 

SHFE aluminum prices mainly struggled around the 5-day moving average on Monday. SHFE 1103 aluminum contract prices climbed rapidly after opening lower at RMB 16,670/mt due to China’s central bank’s action to raise interest rate, with prices briefly hitting a high of RMB 16,750/mt. As the Shanghai Stock Exchange composite index slipped steadily, SHFE 1103 aluminum contract prices faced pressure and finally ended at RMB 16,695/mt, down RMB 25/mt, or down 0.15%. Positions for SHFE 1103 aluminum contract fell by 1,882 lots, showing long investors exited the market after profit-taking. SMM predicts SHFE aluminum prices will continue to fluctuate weakly in the short term.

In spot markets, spot aluminum prices in east China stabilized as SHFE aluminum prices fluctuated narrowly, but downstream producers preferred to take a wait-and-see attitude given heavy cash flow pressure and negative impact from China’s interest rate rise, with mainstream traded prices between RMB 16,180-16,210/mt. Market sentiment in south China was more sluggish than last Friday, and downstream producers were relatively cautious, with mainstream traded prices between RMB 16,290-16,310/mt, unchanged from last Friday levels. 

According to the SMM survey, 21% of market players expect higher aluminum prices, since spot aluminum inventories declined continuously, and aluminum prices will likely move higher in the future after climbing slower previously compared with other base metals prices. 58% of market players are neutral toward aluminum prices, believing that although inflows of speculative funds in SHFE aluminum market remain limited, and China’s central bank raised interest rate, aluminum prices found solid support at the low-end of price range, and price bubbles were small as well, so aluminum prices will remain unchanged in the short term. The remaining 21% of market players are optimistic toward aluminum prices, believing that China’s action to raise interest rate for the second time in 2010 and sluggish demand at the year-end will dampen aluminum prices, but any price declines will be limited. 

Trading sentiment in China's domestic lead markets remained quiet on Monday. Most transactions were made between RMB 16,800-16,900/mt amid the closed LME markets and higher interest rate from the Bank of China, with low-end prices still falling. 

Most market players believe domestic lead prices to be little changed this week under the same capital condition. Despite possibilities of lower offers from lead smelters due to tight capital in early week, domestic lead prices are not expected to be volatile without guides from the LME lead market. Later, smelters are expected to keep offers firm, given that they will have repaid the loans completely for this year.

On December 25th, the Bank of China lifted interest rate again. Some market players believe the higher interest rate will have limited affects on domestic lead prices due to their in-advance anticipations. While some others expect commodity prices will be boosted, given that they believe the higher interest rate means a temporary end of negative news and greater inflationary pressures. Coupled with eased capital pressure after January 2011 and stronger sales of start-up lead-acid batteries, demand in domestic lead markets will be up and SMM expects domestic lead prices to rise in the near future. Despite optimistic views about domestic lead prices in January, most market players are slow to enter the market.

China's central bank announced last Saturday to raise the lending and deposit interest rate by 0.25%, effective on December 26, 2010, the second interest rate hike since October. In this context, SHFE zinc prices fell sharply after opening on Monday. SHFE 1103 zinc contract prices once dipped to a low of RMB 18,580/mt, and pared some losses later boosted by the stronger Shanghai Stock Exchange composite index, with prices mostly moving between RMB 18,700-18,750/mt. In the midday, SHFE 1103 zinc contract prices fell slightly dragged down by the weakened Shanghai Stock Exchange composite index, and finally closed at RMB 18,695/mt, with prices losing support at 5-day moving average. Market players took a wait-and-see attitude, leaving the market quiet. Trading volumes decreased by 140,000 lots to 360,482 lots, and total positions decreased by 6,940 lots to 248,122 lots.

On Monday, the Shanghai Stock Exchange composite index gained on news that China's central bank raised the interest rate. As a result, SHFE three-month zinc contract prices rallied to between RMB 18,700-18,800/mt. In spot markets, #0 zinc was traded between RMB 18,050-18,100/mt, with discounts of RMB 600-650/mt against SHFE 1103 zinc contract prices, and with transactions made at low-end; #1 zinc was traded between RMB 18,000-18,050/mt. Since he market is still absorbing news of interest rate hike, some downstream buyers believe that zinc prices will further fall this week, and are taking a wait-and-see attitude towards future price trends. As a result, the transaction was weak.

As to zinc price trends, 23% of the market players believe that any possible negative policies will be limited during the year-end since China's central bank announced Saturday it will raise the lending and deposit interest rate by 0.25%, and market speculation of inflation was also confirmed. In this context, SHFE zinc prices will unlikely fall, with SHFE 1103 zinc contract prices expected to break RMB 19,000/mt; spot zinc should be traded modestly between RMB 18,000-18,500/mt this week. 57% of the market players believe that SHFE zinc prices will fluctuate at lower levels compared to last week, and SHFE three-month zinc contract prices are expected to move between RMB 18,500-19,000/mt this week; spot transaction will not improve due to weak trading sentiment. The remaining 20% believe that LME zinc prices should fall due to interest rates hike after LME market is opened, and SHFE zinc prices will further fall in response. SHFE 1103 zinc contract prices are expected to dip to below RMB 18,000/mt, and with prices finding support at RMB 17,600/mt. In this context, spot transaction will improve, with traded prices above RMB 17,000/mt.

Mainstream prices in China's domestic tin markets remained stable on Monday without guides from the LME lead market. Tin from Yunnan Tin Group and Jinhai brand tin was traded between RMB 162,000-162,500/mt; tin from Gejiu Non-ferrous Metal Processing Company was traded between RMB 161,500-162,000/mt; other unknown brand tin was traded between RMB 160,500-161,000/mt. Overall trading sentiment was moderate, and downstream producers were reluctant to purchase due mainly to recent higher prices and tight capital at the end of the year.

Supply in China's domestic tin markets has been in shortage recently. China Tin Group stopped to supply goods due to unit maintenance; supply from Yunnan Tin Group and Yunheng brand tin is limited in markets due to the firm offers; so most supplies in markets are minor brand tin. Downstream demand is tepid, while smelters are quoting offers higher, lending some support to higher domestic tin prices. SMM expects domestic tin prices will mainly keep stable this week, with some upward momentum existing.

China's central bank unexpected raised interest rate on Christmas holiday, indicating tight monetary policy. Transactions in the Shanghai nickel spot market were moderate, and downstream purchasing interest was not strong. Average traded prices of nickel from Russia were around RMB 181,750/mt in the morning trading session, up by RMB 750/mt from a day earlier, and average traded prices of nickel from Jinchuan Group were around RMB 182,750/mt, up by RMB 600/mt from a day earlier. Lacking of guidance from LME nickel price movement in the afternoon trading hours, mainstream traded prices of nickel from Russia were around RMB 181,800/mt and from Jinchuan Group were between RMB 182,500-183,000/mt, largely unchanged from the level in the morning trading hours.

Based on the results of SMM survey, 59% market players believed in bullish price outlook this week, and the remaining 41% market players believed in bearish price outlook. The 59% market players hold that guidance from LME nickel price movement will be waned given that buying interest will be lackluster and trading volumes in LME market will be thin during only three transaction days this week. However, ex-works nickel prices from Jinchuan Group remained firm at RMB 184,000/mt, lending support to spot nickel prices. By virtue that purchasing costs were high, traders' unwillingness to move goods will increase. In addition, stock replenishments will increase by the year end. In this context, prices are expected to fluctuate slightly higher. The remaining 41% market players believed that the unexpected interest rate hike from China's central bank, steady increases of LME nickel inventories as well as continuously sluggish downstream demand will be combined to weigh on nickel prices.   


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