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SMM Weekly Review and Forecast (Feb. 21-Feb. 25)
Feb 28,2011 14:21CST
smm insight

SHANGHAI, Feb. 28 (SMM) -- China’s central bank announced on February 19th to raise the deposit reserve ratio from February 24th by 0.5%, the eighth hike since 2010, and the second time since early this year, making the deposit reserve ratio 19.5%. Boosted by the increasing unrest in Lybia and supply shortages, the crude oil future contract prices once hit USD 100 per barrel, and NYMEX gold contract prices continued to rise to USD 1,400/oz. But investors were all seeking for risk adverse assets and left the market given continuous chaos in the Middle East and North Africa. The Dow Jones Industrial Average and the Standard and Poor’s 500 Index were both down, and nonferrous metals prices fell significantly, with SMMI down 2.28%. Zinc and copper prices led the declines of other base metals, with SMMI.Zn down 3.75%, and SMMI.Cu down 2.46%. But lead prices rose slightly on news that the launch of SHFE lead was approved by CSRC (China Securities Regulatory Commission), with SMMI.Pb up 0.29%. Chaos in the Middle East depressed investors’ risk appetite. In this context, nonferrous metal prices should continue to fall in the near term.

Last week, LME copper prices continued to fall. With unrest in Libya growing, crude oil prices rose over USD 100/bbl, but caused LME copper prices to fall sharply.  Investors sold off risky commodities and bought bonds or gold instead. LME copper prices briefly hit USD 9,916/mt on Monday, but a weaker US dollar failed to support copper prices. On Thursday evening, LME copper prices fell as low as USD 9,315/mt, while inventories up as high as 4,750 mt also weighed down copper prices. Trading volumes were 50% higher than 30-day average levels, but considered in line with high trading volumes seen recently. Position closing in the market added to market fears over further price declines. Technically, LME copper prices fell below the 40-day moving average, with prices later moving around the 60-day moving average on Thursday, and still under heavy downward pressure.
Last week, SHFE copper prices fell further after opening low. Although SHFE copper prices hit RMB 74,980/mt on Tuesday, SHFE copper prices opened low on February 23rd after LME copper prices lost ground. Furthermore, a decline to below 2,900 points of China's Shanghai Composite Index also gave no support to SHFE copper prices. On Thursday, SHFE copper prices continued to fall, returning to pre–holiday levels, down as low as RMB 71,020/mt.  SHFE copper prices remain weak technically and will continue to look for support in the short term. 

China's Central Bank again raised the deposit reserve requirement ratio in order to curb excess liquidity, signaling that the government will continue the current tight monetary policy. However, this negative news has been absorbed by the market, and the unrest in Middle East serves as the major reason behind weak SHFE aluminum prices. SHFE 1105 aluminum contract prices tumbled following other base metals prices after briefly climbing to a high of RMB 17,440/mt earlier last week, with prices falling to below the near-term moving averages and even dipping to a low of RMB 16,920/mt on Thursday. Although suppliers kept offers firm in spot markets, and downstream processors have gradually restarted production, providing some support for the low-end of SHFE aluminum prices, pessimism now dominates domestic commodity markets, and SMM believes SHFE aluminum prices will continue to fluctuate between RMB 16,800-17,200/mt in the coming week.

Last week, spot aluminum prices in east China rose first but fell later in response to SHFE aluminum price trends. China's Central Bank again raised deposit reserve requirement ratio on February 18th to curb cash liquidity, and downstream processors resumed production slowly given cash flow pressures. In addition, market players’ optimistic expectations of future aluminum prices were dampened, and downstream purchases of spot aluminum ingot were limited, and middlemen only purchased goods modestly at lower prices. Weak consumption caused mainstream traded prices for spot aluminum to fall gradually, with traded prices moving between RMB 16,670-16,850/mt and market sentiment remaining neutral over the past week.

Last week, investors were seeking risk adverse assets due to increasing unrest in Libya, causing the US dollar index to fluctuate widely between 77 and 78. LME zinc prices surged to USD 2,596/mt last Monday, but then fell to USD 2,450/mt and below all daily moving averages.

SHFE zinc prices led declines of other base metals. On Tuesday, SHFE three-month zinc contract prices fell sharply to RMB 19,150/mt, down 4.2% from RMB 20,560/mt. On Thursday, SHFE 1105 zinc contract prices fell even further to RMB 19,000/mt, with prices closing at RMB 19,140/mt, below all moving averages.

In spot markets, downstream buyers purchased only on an as-needed basis when spot zinc prices were RMB 19,400/mt, while traders purchased actively given spot discounts of RMB 900-1,000/mt.  Spot zinc prices fell to RMB 18,700-18,800/mt in response of lower SHFE zinc prices, and slid further on Thursday to RMB 18,450-18,500/mt and with spot discounts narrowing to RMB 550-600/mt.  Downstream buyers purchased modestly at lower prices, while traders were unwilling to sell goods since they had not closed previous positions.

Zinc prices continued to move higher early last week, while spot zinc prices jumped to RMB 19,400/mt in response, leaving purchasing by downstream buyers muted.  Spot transactions later improved since downstream buyers moved to purchase due to falling zinc prices. Last week, inventories in east China grew by 6,000 mt, to 466 kt, while inventories in south China grew by 3,000 mt, to 140 kt.  Stocks in north China fell slightly by 2,000 mt, to 13 kt.

Boosted by approval of the lead futures market in China, domestic lead prices remained firm last week, despite LME lead prices falling by UDS 151/mt. Traders kept active transactions with optimistic market prospects, and preferred to buy well-known branded lead which will be traded in the futures market. Therefore, well-known branded lead prices were firm between RMB 17,500-17,600/mt, even through LME lead prices kept fluctuating weakly. Downstream producers were sensible and did not hoard lead ingots for speculations, only increasing purchases last Monday when LME lead prices were strong. Mainstream traded prices in China’s domestic lead markets were RMB 17,200-17,550/mt last week. Although downstream producers have resumed normal production and posted positive sales, they were still cautious to purchase. However, after approval of the lead futures market was announced, lead smelters restricted sales and traders paid greater attention to lead ingots, lending support to domestic lead prices. In this context, SMM expects domestic lead prices will fluctuate between RMB 17,200-17,600/mt this week.

Last week in China’s domestic tin markets, mainstream prices constantly fell to near RMB 198,000/mt amid declines in LME tin prices and weak transactions, down about RMB 5,000/mt from a week ago. Some tin smelters also cut offers slightly, but restricted sales, so market supply of tin remained low, supporting spot prices. At present, prices of raw materials are remaining high, and coupled with limited spot inventories at smelters, so prices in domestic tin markets kept relatively firm. Downstream producers were still purchasing on an as-needed basis, but with an escalated wait-and-see sentiment given muted transactions and falling prices.

Prices in the Shanghai nickel spot market tracked LME nickel price trends last week, with prices rising early in the week, but later falling back. Traded prices advanced to between RMB 217,500-218,500/mt on Monday and Tuesday, but fell sharply to between RMB 213,000-214,000/mt on Wednesday due to LME nickel price slump, with sluggish transactions reported. Jinchuan Group cut ex-works nickel prices to RMB 213,‏‎000/mt last Friday, and spot prices continued to fall to around RMB 210,000/mt. Current domestic/LME nickel price ratio is favorable for nickel imports, and an increasing number of traders began to import nickel. Coupled with cargo-holder sell-offs due to price corrections, the supply of nickel in the market from Russia increased, resulting in expanded price spread between nickel from Russia and Jinchuan Group. Given that downstream producers gradually resumed production after the holiday, downstream demand for refined nickel did grow from a week earlier. However, as prices were experiencing corrections, a wait-and-see sentiment grew, resulting in relatively quiet trading.


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