SMM Weekly Review and Forecast (Mar.14th-Mar.18th)

SHANGHAI, Mar. 21 (SMM) -- After the earthquake in northeast Japan, market players began to believe post-earthquake construction would boost base metal demand despite any short-term negative impact on Japan’s economy. However, deteriorating conditions at the Japanese nuclear power plant have triggered market fears of a greater threat, sending the global stocks and commodity markets down sharply, and will continue to put downward pressure on base metal prices in the short term. The US equity market slipped sharply on March 15 and 16, meanwhile, Nikkei index showed signs of meltdown, which both intensified investors' concern. Later, base metal prices rebounded after excessive decline, boosted by Japanese central bank's injection of Yen 400,000 into the market. SMMI rebounded slightly by 1.89% last week. Copper take the lead to rebound, with SMMI. Cu advancing by 3.33%. However, tin and nickel prices were still weak, with SMMI. Ni slipping by 1.77% and SMMI. Sn falling by 1.27%. It is hard to tell whether or not rebound of crude oil and base metals will continue given uncertainties of impact from nuclear crisis in Japan. In this context, commodity prices like crude oil and base metals may face downward pressure.

Copper

After the earthquake struck Japan on March 11th, market players withdrew cash from markets to minimize risk. Markets worries over the growing nuclear crisis in Japan also sent the Nikkei index down by over 10% on two consecutive days. LME copper prices slid below USD 9,000/mt on Tuesday, and were as low as USD 8,944/mt. After sharp losses, market attention shifted to strong post-quake construction-driven demand, which stimulated strong buying. Large injections of cash by the Bank of Japan, totaling nearly 40 trillion Yen, greatly improved market sentiment, helping the Nikkei index and other markets to rally. LME copper prices moved above the 5-day moving average on Wednesday and Thursday, reaching as high as  USD 9,585/mt on Thursday evening as the US dollar index fell below 76 points and as the US reported positive economic data. Technically, LME copper prices were able to find solid support at USD 9,000/mt and gaining upward momentum.  

Last week, SHFE copper prices fell sharply along with LME copper prices. Before the beginning of a new contract month, SHFE 1105 copper contract prices slid to RMB 68,250/mt, but after the transition to a new contract month, SHFE 1106 copper contract prices climbed above RMB 70,000/mt as domestic stocks market rallied after cash injections by the Japanese government, with positions up nearly 13,000 lots, reaching as high as RMB 70,640/mt. On Friday, SHFE three-month copper contract prices opened high due to rising LME copper prices, reaching RMB 72,000/mt, but SHFE copper prices will continue to test support at RMB 70,000/mt. 
 
Unrest in the Middle East and soaring oil prices are raising global inflation concerns. Expectations of rate increases by the European Central Bank will reignite the European debt issue and have a negative impact on financial markets. Uncertainties over Japan’s nuclear crisis and continuing unrest in the Middle East will continue to weigh on the US dollar, but will support copper prices. Power supplies and transportation networks in Japan have been greatly affected by the earthquake, but post-earthquake construction will buoy copper markets. In addition, the Japanese government will certainly continue its current loose monetary policy for the foreseeable future. The dominant short trader cut holdings on March 16th to 10%-20% from 30%-40%, further restricting downward room for prices to fall. 

In summary, LME copper prices will consolidate at USD 9,200/mt and move toward USD 9,600/mt. SHFE copper prices will continue to test RMB 70,000/mt and above. In China’s domestic spot market, downstream producers made purchases at lower prices, helping market sentiment improve. SMM believes low-end of traded prices in the spot market will increase in the coming week, with deals expected between RMB 70,000-72,000/mt. 

Aluminum

SHFE aluminum prices were also weaker than SHFE copper and zinc prices, with prices falling to around RMB 16,500/mt last seen before October 2010. SHFE aluminum prices fell gradually along with the 5-day moving average last week, with prices even falling below RMB 16,600/mt and RMB 16,500/mt marks consecutively. Transactions were bearish, and the pessimistic sentiment dominated market players. Profit margins at domestic aluminum producers fell continuously. Spot aluminum prices fell slower since they were supported by costs. However, similar to LME aluminum prices, SHFE aluminum prices will also require positive news to rebound, and SMM predicts SHFE aluminum prices will likely fluctuate at current low levels in the short term. 

SHFE aluminum prices fell continuously last week, and spot market sentiment was sluggish as well, with spot aluminum prices slipping to break through RMB 16,500/mt and RMB 16,400/mt consecutively, which heavily dampened suppliers’ optimistic sentiment. However, suppliers still kept offers firm due to narrowing profit margins. Spot discounts over SHFE current-month aluminum contract prices failed to widen significantly after transitioning into a new contract month on Wednesday. Suppliers became unwilling to move goods, while buying interest at lower prices improved slightly, keeping overall transactions neutral last week. Last week, spot transactions in south China were similar to east China, and local aluminum prices were still RMB 50-60/mt higher than prices in Shanghai, unchanged from a week earlier. Although downstream consumption was improving, and downstream buying interest at lower prices increased slightly as well, suppliers became unwilling to move goods. As a result, overall market sentiment reported no remarkable improvement.

Zinc

Last week, Japan’s earthquake was the main factor influencing zinc prices. At one point, LME zinc prices plunged to USD 2,242/mt, but market sentiment improved once Japan’s Central Bank injected funds and Japan’s Emperor addressed the nation. As a result, LME zinc prices still struggled, but found support at USD 2,300/mt.

SHFE 1106 zinc contracts became the most actively traded, but tracked LME zinc prices down, falling to RMB 18,000/mt. SHFE zinc prices fell as low as RMB 17,790/mt last Thursday, close to the record low from November 2010. In spot markets, spot zinc prices fluctuated between RMB 17,500-17,800/mt, keeping most market players out of the market. SHFE three-month zinc contract prices stabilized at RMB 18,000/mt on Thursday so downstream buyers increased purchases, causing spot transactions to improve. Market confidence was again low on Thursday when SHFE prices fell sharply.

Last week, zinc prices fluctuated at low levels, with spot zinc prices moving as low as RMB 17,500-17,800/mt. Smelters were unwilling to sell goods, so supply was mainly available from arbitragers. Last Thursday, SHFE three-month zinc contract prices stabilized at RMB 18,000/mt, allowing downstream buyers to increase purchases. However, market players began to retreat from the market as SHFE zinc prices fell in afternoon trading, leaving overall transactions quiet. Inventories in east China fell slightly by 1,000 mt, to 465.5 kt, and stocks in south China fell by 6,000 mt, to 142 kt. Inventories in north China were down 1,000 mt, to 7kt. 

Lead

Simulated lead futures trading began last week, a precursor of the coming SHFE lead futures market. Jiangxi Jinde Lead Stock Company and Lingbao Xinling Lead Industry Company showed little selling interest while conducting unit maintenance. However, domsetic lead prices were lower due to recent profit-taking, and coupled with strict downstream environmental protection inspections, as well as weak demand, trading sentiment in domestic lead markets kept quiet before mid-week. In this context, domestic lead prices failed to rebound and remained at RMB 17,050-17,150/mt for the first three days of last week despite gains in LME lead prices. 

Over the weekend, trader’s transaction activities became active and domestic lead prices rose to RMB 17,400-17,500/mt, due to rebounding LME lead prices, and due to higher market confidence from the coming SHFE lead futures market on March 24th. However, downstream producers were unwilling to accept the lead prices, and showed relatively lower buying interest. Since the SHFE lead futures market will open this Thursday, smelters were unwilling to move goods, and traders also restricted sales in anticipation of higher prices in the future. Amid limited market supply and trader speculation, domestic lead spot prices are expected to rise further in the short term, if LME lead prices continue to clime and approach USD 2,712/mt which is the highest level since January 2011. In this context, SMM expects domestic lead prices to between RMB 17,350-17,700/mt this week.

Tin

Last week in Shanghai tin markets, prices fell first but rebounded later. In 1H of last week, market confidence was negatively affected by sharp losses in the LME tin market, and some minor branded tin producers cut ex-works prices in response, resulting in increased low-priced goods. In this context, mainstream prices in Shanghai tin markets fell to RMB 192,000-194,000/mt. However, overall market supply was still low, and low-priced goods were gradually used, and coupled with strongly rebounding LME tin prices, prices in Shanghai tin spot markets stopped falling and stabilized. Although domestic tin prices were largely falling last week, transactions were still muted, without significant improvement, as downstream producers still purchased on an as-needed basis. But major branded tin smelters remained firm offers.

Nickel

In the Shanghai nickel spot market, prices continued to fall, recording the biggest decline last Wednesday.  Escalating radiation leaks at a Japanese nuclear plant damaged in the earthquake dampened commodity markets and caused LME nickel prices and spot prices to fall sharply. Jinchuan Group firstly cut but later lifted ex-works nickel prices last week, with current ex-works nickel price at USD 197,000/mt, down by a total of RMB 6,000/mt from a week earlier. At present, current market prices were between RMB 197,000-198,500/mt, and with overall trading sentiment relatively quiet. Japan's nuclear disaster and unrest in the Middle East unrest are ongoing, which continues to fuel the wait-and-see sentiment in the market. Tight cash supply during 1Q dampened downstream consumption, and coupled with pessimistic sentiment, was keeping downstream purchases sparse. Demand for nickel from Jinchuan Group was relatively strong, as supply of Jinchuan nickel was tight but supply of imported nickel from Russia were relatively ample.

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