Metals News
SMM Weekly Review and Forecast (Feb. 28th-Mar. 4th)
smm insight
Mar 7,2011

SHANGHAI, Mar. 7 (SMM) – China’s manufacturing PMI was 52.2% in February 2011, down 0.7% on a monthly basis, but the falling pace narrowed significantly compared with the previous level. The reading of above 50% indicates that China’s economy remains in a period of expansion. But, the purchasing price remained high, a sign that inflation pressures stay high. The US dollar index fell to a 4-month low of 76.53, as quantitative easing policies remain in place in the US, while turmoil in the Middle East and North Africa was keeping gold and oil prices high. Surging oil prices were adding to market expectations of global inflation. Last week, SMMI was up 0.77%, and major base metals reported mixed movements, with nickel prices leading gains. SMMI.Ni rose 1.7%, while SMMI.Al and SMMI.Zn fell, down by 0.33% and 0.27%, respectively. China’s National People’s Congress, beginning March 5th, will develop guidelines for the 12th Five-Year Plan period, and market players are all waiting for clearer directions from the meeting. 

Last week, crude oil prices continued to rise due to turmoil in Libya, with prices closing on Thursday at USD 102/bbl, triggering market concerns over the possibility of slowing economic recovery, as well as higher inflation. LME copper inventories continued to rise, bringing total LME inventories above 420 kt and the highest level since July 2010, but both negatively affected LME copper prices. The US dollar index closed lower at 76.53 and the US announced a series of positive economic data, including the February consumer confidence at a 3-year high. The February CPI for the Euro zone exceeded targets set by the European Central Bank for the third consecutive month, sending the US dollar down to a 4-month low against the Euro.  In addition, higher refined copper consumption recently announced by the Chinese Government boosted market confidence. All these favorable factors helped LME copper prices rally. After falling to USD 9,706/mt in early trading on Monday, LME copper prices rallied to reach USD 9,979/mt on Thursday. The dominant short trader, mentioned in the previous week’s report, reduced holdings to 30%-40%. Generally speaking, LME copper prices bounced back to around USD 9,850/mt.
In the SHFE copper market, prices stabilized as China’s Shanghai composite index rebounded to 2,900 points, with SHFE copper prices moving between RMB 73,800-74,750/mt. On Wednesday, SHFE copper prices were up 3% from the previous week’s low, hitting RMB 74,790/mt, but later met resistance at RMB 75,000/mt. Market players were waiting until after China’s NPC and CPPCC are concluded to see clearer trends. 
Positive US economic data, stable US interest rates, and a low US dollar index are all supporting LME copper prices, leaving open the possibility of future price rallies. However, turmoil in the Middle East will continue to weigh on US stocks, with the Dow Jones showing a technical downward trend. In this context, LME copper prices should fluctuate at high levels, but test USD 10,000/mt after holding steady at USD 9,800/mt.  

In the SHFE copper market, upward momentum is technically possible as markets are optimistic towards copper consumption, but domestic stocks markets are awaiting news from the ongoing NPC and CPPCC for more direction. Although downstream purchases fell after copper prices rose to RMB 73,500/mt, cargo-holders remain optimistic and expressed little interest in selling goods while spot discounts gradually narrowed. With the arrival of the delivery date, spot discounts will become spot premiums and improved purchases during the seasonal peak demand period will push up copper prices. In this context, SHFE copper market will find solid support at RMB 74,000/mt and test RMB 75,000/mt, while spot copper prices will be RMB 73,000-74,000/mt as spot discounts narrow. 
Although aluminum consumption has improved, SHFE aluminum prices have fallen steadily due to tight cash flows, sluggish transactions, and excessive aluminum capacity. SHFE 1105 aluminum contract prices fell below the 60-day moving average and tested support at RMB 17,000/mt. Tightening monetary policies in China remain the major negative factor affecting SHFE aluminum prices. However, alumina prices should rise steadily, which will help drive up the low-end of domestic aluminum prices. In this context, any declines in SHFE aluminum prices will be limited and SMM predicts SHFE aluminum prices will continue to fluctuate at lower levels in the short term.
Last week, spot aluminum prices were weak in east China due to high aluminum inventories and sluggish consumption. Middlemen purchased goods aggressively at lower prices, but downstream processors were still cautious toward purchases. Cargo-holders were unwilling to move goods early last week as spot aluminum prices fell to below RMB 16,600/mt. The strengthening LME aluminum prices late last week helped boost domestic market confidence, and spot aluminum prices returned to the RMB 16,600/mt mark as a result, with market sentiment improving slightly. Traded prices for spot aluminum were between RMB 16,580-16,700/mt over the past week, with overall market sentiment neutral. In south China, aluminum prices moved higher along with the recovery of downstream consumption, with discounts over Shanghai prices turning to premiums. Although weak SHFE aluminum prices dampened spot aluminum prices, traders' strong unwillingness to move goods provided strong support for aluminum prices at RMB 16,600/mt. Traded prices for spot aluminum were between RMB 16,630-16,680/mt over the past week, with overall market sentiment brisk.

Early last week, LME lead prices moved up to stay above USD 2,500/mt amid positive US economic data and a lower US dollar index. However, unrest in Libya increased the volatility of oil prices, with LME lead prices fluctuating between USD 2,520-2,570/mt in response. Over the weekend, market confidence improved after tensions in Libya appeared to ease, allowing LME lead prices to rise to USD 2,610/mt, but meeting resistance at USD 2,585/mt. Some media sources reported the Libyan crisis may be resolved peacefully, easing market concerns. The US dollar index fell below 77, a new low since November 2010, and any room for increases in this index should be limited in the short term. SMM expects LME lead prices to find solid support at USD 2,550/mt and fluctuate around USD 2,600/mt in the coming week.
Last week in China’s domestic lead markets, traders’ sentiment turned down despite operation resumptions at downstream producers, due to environmental protection inspections which negatively affected operations at small and medium sized downstream producers. Lead smelters continued to restrict sales in anticipation of the opening of a lead futures market in China. Domestic lead prices were RMB 17,300-17,600/mt last week. Ongoing environmental protection inspections may continue to restrict operations at lead-acid battery producers in East and North China, so lead demand will not likely improve in the short term. However, traders anticipating the opening of China’s lead futures market may become more active if LME lead prices move higher. In addition, market supply was down as lead smelters restrict sales and due to unit maintenance. In response, domestic lead prices may inch up in the near term, and SMM believes domestic lead prices will be RMB 17,400-17,800/mt this week. 
Last week, zinc prices underwent corrections, with LME zinc prices fluctuating around USD 2,500/mt as a result of chaos in Libya and volatile crude oil prices.  Crude oil future contract prices rose to USD 100/bbl last Wednesday, pushing down LME zinc prices to USD 2,486/mt, which is below the 20-day moving average.
Last week, SHFE 1105 zinc contract prices fluctuated between RMB 19,000-19,500/mt, finding solid support at RMB 19,000/mt.  Spot transactions were also quiet.  Downstream buyers made only modest purchases at lower prices, anticipating lower prices.
Last week, spot zinc prices experienced fluctuations. Downstream buyers made only modest purchases at lower prices since they believe zinc prices would fall, leaving spot transactions muted. Inventories in east China remained unchanged at 466 kt, but inventories in south China grew by 3,000 mt, to 143 kt. Supplies in north China were mainly available directly from smelters, but who were unwilling to sell goods given spot zinc prices below RMB 19,000/mt, which caused inventories in north China to fall slightly by 3,000 mt, to 10 kt. 

Last week, prices in Shanghai tin markets rose slightly, with mainstream prices between RMB 201,000-203,000/mt. Largely, low-end prices were up from a week earlier. Amid limited market supply and rising LME tin prices, traders’ low-priced goods were sold out, and thus raised offers. Trading sentiment was quiet, with downstream producers purchasing on an as-needed basis depressed by constantly rising prices. Smelters were unwilling to move goods waiting for higher prices. Coupled with high raw material prices and limited tin ingot inventories, smelters’ selling interest was low.

In the Shanghai nickel spot market, prices fluctuated narrowly and overall trading sentiment was relatively quiet. Jinchuan Group raised ex-works nickel prices by RMB 3,000/mt last Tuesday, to RMB 216,000/mt, lending limited support for spot nickel prices. Mainstream traded prices of Jinchuan nickel were in the RMB 215,000-215,500/mt range, while mainstream traded prices for nickel from Russia were near RMB 214,000/mt. The price spread between nickel from Jinchuan Group and nickel from Russia is expanding since nickel from Russia was increasing, but supply of nickel from Jinchuan was still limited. Coupled with traders’ cautious sentiment, transactions of Jinchuan Nickel at current high prices were sparse, and deals were dominated by nickel from Russia. Due to Arab political unrest, fluctuations in LME nickel prices grew and any short-term price trend is not clear. In this context, a wait-and-see sentiment was growing, leading to quiet trading and lower prices.


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