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SMM Weekly Review and Forecast (Feb. 7-11)
Feb 14,2011 15:41CST
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SHANGHAI, Feb. 14 (SMM) -- Both the US Manufacturing Purchasing Managers' Index (PMI) for January released by the Institute for Supply Management (ISM) and the lower unemployment rate during January were positive signs of growth for the US economy. The US dollar index moved between 77 and 78, and the Dow Jones Industrial Average closed with gains for eight consecutive trading days, and LME copper prices broke through USD 10,000/mt, leading to higher LME base metals prices. The People's Bank of China (PBOC) announced on February 8th that it would raise benchmark one-year deposit and lending rates by 25 basis points beginning February 9th, with other term deposit and lending rates rising accordingly, weighing down base metals prices in the short term. Although SHFE base metals prices opened significantly higher after the SHFE market reopened, any gains in base metals prices were limited due to the tightening monetary policies including interest rate hike, and since consumers and downstream processors have not returned to the market yet. SMMI grew by 2.87% during the Chinese New Year holiday, with tin, nickel and copper prices rising by the most. LME tin prices set a new high of USD 31,800/mt, and SMMI.Sn rose by 7.36% in response, leading base metals prices increases. SMMI.Ni followed suit, rising by 4.84%, since Jinchuan Group raised nickel ex-works prices continuously by 6.5% before the Chinese New Year holiday.

Political unrest in Egypt continued to influence markets since late January, with crude oil prices rising to USD 92.8/bbl. Strong energy stocks drove up the Dow Jones Index, and the commodity market followed suit. The US government announced a series of positive economic results during the Chinese New Year holiday period, including gains in personal income, an ISM manufacturing index in January of hitting 60.8, the highest growth in seven years. The Chicago PMI in January rose unexpectedly and jobless claims were down, a sign of a strengthening US labor market. The Dow Jones Index rose over eight consecutive days from January 31st, boosting investor confidence with regard to copper demand in 2011. LME copper prices rose over four consecutive days and set a record high of USD 10,160/mt on February 4th. LME copper prices closed with slight gains on February 8th after absorbing the news that China had again raised benchmark interest rates. Later in the week, the US dollar index was up, boosted by positive economic and employment data, but pushed down LME copper prices to between USD 9,900-10,000/mt. Recently, the US dollar index has rebounded, and the European debt crisis has eased to an extent, but the core issues still exist. In addition, LME copper inventories near 400 kt, with growth mainly in Asian warehouses. Hence, high-end LME copper prices may be tested by the rising US dollar index and high inventories.  

In the SHFE copper market, prices rose during the last two trading days before the Chinese New Year holiday in response to higher LME copper prices. The SHFE 1105 copper contract, the most active, broke through RMB 75,000/mt and helped raise the SHFE/LME copper price ratio. SHFE copper prices climbed to a record high of RMB 76,440/mt on February 9th, the first trading day after the holiday. SHFE copper 1105 contract fell to a low of RMB 75,120/mt on the morning on February 9th after absorbing the news that China had raised benchmark interest rates by 0.25%. In response, shorts sold out positions, causing prices to rally. In afternoon trading, prices closed with losses, dragged down by a weak Shanghai Stock Exchange Composite Index. On February 10th, SHFE copper prices opened low due to declines in LME copper prices overnight, but rose steadily with support from longs sentiment, and with SHFE copper 1105 contract positions increasing sharply. Finally, longs sold out positions after profit-taking, which narrowed previous gains, but SHFE copper 1105 contracts still closed with strong gains. On February 11th, copper prices continued to rise after opening high, but fell slightly in the afternoon due to a stronger US dollar index. In response, shorts closed positions, with copper prices later meeting resistance after rallying to moving average levels. Despite resistance, SHFE copper prices were still able to hit a record high of RMB 76,550/mt. Although SHFE copper prices were mixed last week, prices were still generally advancing. SHFE copper 1105 contract positions increased gradually, a sign of growing investor appetite after the holiday. 

China will announce major economic data for January in the coming week. The CPI is expected to remain high and China will likely enact additional tighter monetary policies, with capital pressure not expected ease until early March. Most commercial banks have already exhausted credit for January and February, and coupled with the limited number of working days remaining in February, capital pressure in China’s financial markets is expected to be heavy in the short term. Although China has begun to ship bonded copper inventories to LME-monitored warehouses, copper inventories in China’s bonded warehouse are expected to remain high, since follow-up long term contracts will arrive continuously beginning in March. Even though China is now in its high-demand period for copper, copper supply is sufficient, with inventories in both London and Shanghai increasing. The SHFE/LME copper price ratio is expected to be low and copper consumption may slow due to higher prices and tightening credit policies.

In this context, copper prices are expected to experience corrections after sharp gains in the short term, despite positive medium-to-long term momentum. 

SHFE aluminum prices moved lower after opening high due to pre-holiday profit-taking and the recent interest rate hike, but support at low-end price was found, with buying extremely brisk below RMB 17,000/mt. Although domestic aluminum consumption will gradually improve as downstream production resumes in the coming week, any room for SHFE aluminum prices to rise will be limited due to current high inventories. SMM believes that SHFE aluminum prices will meet resistance in the short term, despite a bullish medium-term price outlook.

Last week was the first trading week after the Chinese New Year, and spot aluminum prices stabilized above RMB 16,700/mt. China's unexpected interest rate hike triggered market players' cautiousness, and aluminum consumption has not yet fully recovered. Meanwhile, arrivals of aluminum ingot increased during the holiday, and suppliers were moving goods actively after the holiday, resulting in ample aluminum supply. In this context, buying interest was down, and trading sentiment was muted last week.   

In China's domestic lead markets, transactions were limited at the last trading day before the Chinese New Year holiday, but offers remained firm. Post-holiday traded prices for lead ingots were RMB 17,100-17,200/mt boosted by a stronger LME lead market. Most downstream producers remain closed which kept lead demand still soft, and coupled with declines in LME lead prices, domestic lead prices fell slightly later, with transactions made between RMB 17,100-17,200/mt in the Shanghai market on February 10th.

The US dollar index rose to stand above 78 again due to positive economic data, and LME lead prices met resistance between USD 2,450-2,550/mt in response, but still find support at the 60-day moving average. Close attention should be paid to China's January CPI, which will be published this week. Market concerns about more aggressive credit policies grew after increases of interest rate in China. Downstream demand is expected to remain soft this week, and lead smelters will likely keep offers firm at RMB 17,000/mt due to cost concerns. In this context, SMM expects domestic lead prices to fluctuate between RMB 16,900-17,100/mt this week.

The SHFE market was closed during the Chinese New Year holiday. Both the US ISM Purchasing Managers Index (PMI) and jobless claims during January were positive signs of growth for the US economy. The US dollar index moved between 77 and 78, pushing up LME zinc prices, which opened at USD 2,240/mt on February 1st, later hitting USD 2,500/mt on February 3rd, but struggling at that level. China’s Central Bank announced on February 8th it would raise one-year lending and deposit interest rates by 0.25%, as well as adjusting other term lending and deposit interest rates. These actions weighed down LME zinc prices, with prices closing at USD 2,500/mt on February 9th and falling short of the 5-day moving average. LME zinc prices were up 3.5% during the Chinese New Year holiday from 2-8 February.

SHFE zinc prices rose on February 9th ,following LME zinc trends, with SHFE 1104 zinc contract prices opening at RMB 19,640/mt, but falling back due to the interest rate hikes. SHFE 1104 zinc contract prices moved between RMB 19,300-19,600/mt post-holiday, but transactions were quiet.

Spot transactions were also quiet since downstream manufacturers had built stocks when pre-holiday zinc prices were between RMB 17,600-17,800/mt. In addition, some downstream plants have not yet restarted production. Traded prices of spot zinc were between RMB 18,700-18,900/mt last week. SHFE 1105 zinc contract became the most actively traded contact on Thursday, and spot discounts against SHFE 1105 zinc contract prices were RMB 800/mt, but would not likely expand as delivery nears.

Transactions in the Shanghai tin market were muted in recent two markets due to the Chinese New Year holiday. Pre-holiday transactions were also limited given that traders were closed ahead of time, with some traders keeping offers firm. Transactions during 9-10 February improved to an extent. However, some traders and downstream producers were still absent; market supply was in shortage due to some smelters' unwillingness to move goods in anticipation of higher prices, and given downstream producers were slow to purchase. In this context, transactions could not reflect the actual demand in markets. SMM expects trading sentiment to be brisk and price movement to be clearer this week.

Transactions were extremely sluggish in the Shanghai nickel spot market from January 28th to February 10th due to the Chinese New Year holiday, improving only slightly on 9-10 February since most traders were still on holiday. Following Jinchuan Group’s first price increase to RMB 202,000/mt on January 27th, the company raised nickel prices four times, by a total of RMB 13,000/mt, to 215,000/mt. These increases also boosted spot nickel prices, and as of last Thursday, traded prices for nickel from Jinchuan Group were between RMB 217,500-218,000/mt, while traded prices for nickel from Russia were between RMB 216,500-217,000/mt, with sluggish trading sentiment reported.

According to the most recent data, stainless steel inventories at 26 warehouses in the Wuxi market were 202.2 kt, up by 4.3%, and include 12.7 kt of #200 stainless steel, 161.1 kt of #300 stainless steel, and 28.4 kt of #400 stainless steel. Market participants in stainless steel market were largely on holiday, keeping transactions quiet.


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