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SMM Weekly Review and Forecast (Feb. 14-18)
Feb 21,2011 16:30CST
smm insight

SHANGHAI, Feb. 21 (SMM) --The National Bureau of Statistics (NBS) published on February 15th that China’s January consumer price index (CPI) rose by 4.9% YoY. NBS cut weighing of food in CPI, and raised weighing of house in CPI, resulting in far lower-than-expected CPI in January. In this context, market concerns on inflation eased to an extent, but China is still confronting with heavy inflation. Performance in China’s non-ferrous metals markets were mixed last week, with SMMI gains of 0.15%. Tin and zinc prices reported the largest gains, with SMMI. Sn up 5.17% and SMMI. Zn up 2.6%. Emerging countries, including China, likely continue to adopt more tight credit policies, which may negatively affect financial markets. In addition, Middle East, Egypt, Israel and Iran unrest may also cast influences on short-term financial markets. Global investors are worrying that the unrest will expand to the whole Middle East and cut off petroleum supply, and lead to great turmoil in markets finally. SMM expects metals markets to widen fluctuations in the short term.

Last week, SHFE copper prices fell back from recent highs, tracking declines in LME copper prices. Early last week, the Shanghai Composite Index rose above 2,900 points, boosting market sentiment in the SHFE copper market.  SHFE copper prices opened high on Tuesday, but lacked momentum after hitting a new high of RMB 76,950/mt.  Later profit-taking then sent SHFE copper prices lower.  According to official data, China's CPI for January  surged to a 10-year high, excluding food prices, triggering market concerns over further credit tightening measures and causing LME copper prices to fall.  Following LME copper price trends, SHFE copper prices fell to RMB 74,520/mt on Thursday.  In addition, continuous increases in SHFE copper inventories also weighed on copper prices.  Positions grew daily, suggesting that market optimism towards copper prices was still strong, but trading volumes were only moderate.  Corrections are expected based on technical indicators, with longs reducing or closing positions.  With post-holiday optimism, SMM believes SHFE copper prices will continue to follow movements of LME copper.
Last week, LME copper prices rose at first, but then fell back.  With the resignation of the Egyptian president, market sentiment improved on Tuesday and LME copper prices hit a new high of USD 10,190/mt.  The release of favorable US economic data also boosted market expectations towards the US economic recovery, helping push up the US dollar index but push down copper prices as low as USD 9,709/mt.  LME copper inventories grew significantly over this past week and cancelled warrants continued to fall. Premiums for cash over three-month contracts fell by almost 90% over the past month, raising concerns over demand and resulting in copper price corrections as well.  LME copper prices met resistance at USD 10,000/mt, but buying on Thursday gave support to prices at the USD 9,700/mt mark after falling to the 30-day moving average. 

Rising crude oil prices, a US dollar index near 78, as well as accelerating economic recovery in the US and Europe, will all support long views towards medium-term copper prices.  SMM believes that the LME copper market will continue to be affected by the US dollar index in the coming week, and that prices will hover at high levels.

Domestic aluminum consumption remains sluggish, and trading sentiment on the SHFE aluminum was lackluster, with trading volumes of SHFE 1105 aluminum contract increasing significantly. SHFE aluminum prices kept fluctuating around the 5-day moving average over the past week. SHFE 1105 aluminum contract prices fluctuated between RMB 17,150-17,300/mt during the first two trading days of last week, and later opened significantly lower on Wednesday, hitting RMB 17,020/mt, allowing a large number of deals to be made at lower prices. As a result, SHFE 1105 aluminum contract prices reversed previous losses rapidly, but still lacked upward momentum despite buying activity at the low-end of price range, so later SHFE aluminum prices kept fluctuating in a narrow band. Domestic market fundamentals are expected to improve after the Lantern Festival on February 17th. Recently, the Shanghai Stock Exchange composite index stood above 2,900 points, helping boost market sentiment. In this context, SMM predicts SHFE aluminum prices will likely move higher, with SHFE 1105 aluminum contract prices expected to fluctuate between RMB 17,000-17,500/mt in the short term.

Aluminum ingot supplies were sufficient in spot markets, and although suppliers faced heavy stock pressure due to fewer working days in February, they kept prices firm, believing improvements in aluminum consumption will boost aluminum prices. As a result, spot aluminum prices fell at a slower pace compared with SHFE aluminum prices, with traded prices mainly moving between RMB 16,770-16,810/mt. Downstream processors resumed operations slowly, and only middlemen made some purchases at lower prices, but spot supplies were sufficient due to high spot aluminum inventories. As a result, almost no deals were made above RMB 16,800/mt, and overall market sentiment was neutral.

Last week, news that Egyptian President Hosni Mubarak would step down eased unrest in Egypt. China’s CPI for January was up 4.9% YoY, resulting in increasing expectations of tightening monetary policies.  The US core producer price index for January was also up 0.5% MoM, the highest level in two years.  In this context, the US dollar index moved between 78.0 and 78.6, and LME zinc prices fell to between USD 2,450-2,500/mt.

SHFE 1105 zinc contract prices fluctuated between RMB 19,400-19,800/mt early last week.  On Wednesday, total positions of SHFE 1105 zinc contracts grew by over 10,000 lots within the last half hour  of trading, pushing up SHFE 1105 zinc contract prices to RMB 20,000/mt.  Last Thursday, SHFE 1105 zinc contract prices opened at RMB 20,000/mt, but were unable to stabilize at this level.

In spot markets, spot zinc prices fluctuated around RMB 18,800/mt early last week, but rose to RMB 19,000/mt on Wednesday, tracking SHFE zinc prices.  Downstream buyers purchased only modestly at higher prices since they had already built stocks prior to the Chinese New Year holiday.  Transactions from traders were active early last week due to deliveries.  On Wednesday, spot discounts expanded to RMB 800-900/mt along with the rising SHFE zinc prices, but traders had to stay on the sidelines as they had not previously closed positions.

Some downstream plants have gradually restarted production post-holiday.  Last week, total inventories were up modestly. Inventories in east China grew by 3,000 mt, to 460 kt, while inventories in south China grew by 1,000 mt, to 137 kt.  Inventories in north China were up slightly, adding 1,000 mt, to hit 15 kt.  Most of the increased inventories are for hedging deliveries, a sign that the financial role of zinc is more important than current weak demand.

In China’s domestic lead markets, prices were mainly stable above RMB 17,000/mt last week after LME lead prices rose to USD 2,600/mt, with mainstream prices reported between RMB 17,000-17,300/mt. Lead supply was sufficient since downstream producers were closed during the Chinese New Year holiday period, while lead smelters maintained normal production.  Downstream producers resumed production last week and were now consuming lead ingot stocks purchased before the holiday when prices were below RMB 17,000/mt. Generally, downstream producers’ buying interest was low, leaving transactions in domestic lead markets limited. 
Early last week, spot prices in Shanghai tin markets kept rising supported by supply shortage, with mainstream prices up to RMB 202,000-204,000/mt. Yunnan Tin Group raised offers to RMB 205,000/mt. Since last Wednesday, price gains in Shanghai tin markets slowed, due to declines in LME tin prices and dampened downstream demand at high prices. Last Thursday, LME tin prices fell significantly, and coupled with lower downstream demand in China, prices in Shanghai tin markets stabilized. Tin smelters still show low selling interest with high offers, so market supply is limited; downstream producers’ raw material stocks are low, and thus need to buy tin. Hence, despite LME tin prices show downward trend technically, spot prices in Shanghai tin markets are expected to mainly keep stable in the short term due to limited market supply in China, but with possible declines.

Prices in the Shanghai nickel spot market also firstly rallied but fell back later last week, with prices rising first after Jinchuan Group's price adjustment, but then falling due to sluggish consumption. Jinchuan Group raised ex-works nickel prices to RMB 218,000/mt last Tuesday, boosting mainstream traded prices in spot markets to between RMB 218,000--219,000/mt. However, fluctuation of LME nickel prices, growing wait-and-see sentiment due to inflationary pressure at various countries, coupled with weak downstream demand and cautious trading sentiment from unclear trend of LME nickel prices, made transactions quiet and largely among traders. Deliveries of nickel from Russia were still limited, so market supply was dominated by nickel from Jinchuan Group.


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