SMM Daily Review - 2011/3/21 Base Metals Market

SHANGHAI, Mar. 22 (SMM) --

Copper

SHFE 1106 copper contract prices, the most active one, opened slightly down RMB 40/mt at RMB 71,710/mt on Tuesday, and then briefly slid to RMB 71,310/mt after the opening.   SHFE three-month copper contract prices experienced fluctuations for the whole trading day, with great resistance available at the RMB 72,000/mt mark, failing to stand at RMB 71,700/mt, despite briefly reaching RMB 71,900/mt. Finally, the copper for delivery in three months in the SHFE market closed at RMB 71,480/mt, down RMB 270/mt, or a loss of 0.38%. Positions for SHFE three-month copper contract prices were down 258 lots, while trading volumes were down 33,160 lots. China's central bank lifted the reserve requirement ratio last Friday, raising market concerns over tightening measures in China. Meanwhile, the deteriorating conditions in the Middle East, and the threat of nuclear plant in Japan also depressed market sentiment. A series of uncertainties are adding risks to copper market, and with growing risk aversion sentiment, leaving copper market in an unfavorable sentiment.

In the spot market, narrow fluctuations in the SHFE copper market restricted the price gap of spot traded prices, and limited supply kept spot premiums between positive RMB 20-100/mt. Traded prices for standard-quality copper were between RMB 71,150-71,300/mt, and RMB 71,200-71,400/mt for high-quality copper. Downstream producers were continuing to make purchases on an as-needed basis due to optimistic outlook for long-term movements, while speculators were wary of purchases due to limited price gap between different contracts in the SHFE copper market and no signs of price increases. In general, the overall trading sentiment was moderate.

According to SMM's survey of market movements this week, approximately 47% of market players take a neutral attitude towards the outlook. The commodity market was exposed to greater risks along with Japan's nuclear crisis and the unrest in the Middle East, and limited cash flow restricted the rising momentum in the copper market. The falling US dollar index recently helped support copper prices. Hence, those players are neutral about copper prices. Around 32% of players in the survey are pessimistic about copper prices, as market risk aversion sentiment will increase further along with a coalition war on Libya and soaring oil prices. Meanwhile, the uncertainty remains in Japan's nuclear power plant. In addition, China may take further measures to cope with inflationary pressure after the reserve requirement ratio hike last Friday. All these negative factors both home and abroad will weigh on copper prices. However, about 21% of players are still optimistic about the outlook. They believe that an upward momentum is technically available after LME copper prices rallied strongly last week, and tested the 20-day moving averages for two straight day. Moreover, the falling US dollar index will also support copper prices, as evidenced by a higher fluctuating band of copper prices at around USD 9,500/mt. In domestic copper market, downstream producers are active in purchases at low prices, and copper prices will receive further support from market fundamentals along with rising orders during the traditional peak demand period and higher purchasing interest.

Aluminum

SHFE 1105 aluminum contract prices opened slightly higher at RMB 16,570/mt on Monday, and later kept fluctuating narrowly, with heavy pressure reported at RMB 16,600/mt. At the tail of trading, the Shanghai Stock Exchange composite index returned to 2,900 points, helping drive up SHFE 1105 aluminum contract prices, and SHFE 1105 aluminum contract prices finally closed at a high of RMB 16,610/mt, up RMB 65/mt compared with the previous trading day, or up 0.39%. Monday was the first trading day after China’s central bank announced on Friday to again raise the bank reserve requirement ratio by 50 basis points, and trading sentiment was bearish in other base metals markets and financial markets, but as investors have gradually absorbed the tightening monetary policies in China, they showed some buying interest at lower prices. SHFE aluminum prices closed with slight gains for two consecutive days, with support found at above the 5-day moving average. Positions of SHFE 1105 aluminum contract fell by 586 lots, and time is still needed for SHFE 1106 aluminum contract to become the most actively traded contract. Since spot aluminum consumption remains weak, SMM predicts SHFE 1105 aluminum contract prices will struggle around the 10-day moving average in the short term.

Traded prices for spot aluminum were between RMB 16,440-16,460/mt in east China on Monday, with discounts of RMB 10-30/mt over SHFE current-month aluminum contract prices. SHFE aluminum prices kept fluctuating in a narrow band after opening slightly higher, helping drive up spot aluminum prices. Most traders moved goods aggressively at higher prices, but low market buying caused mainstream traded prices to fall gradually, and overall market sentiment was extremely sluggish. In the midday, weak consumption caused a small number of traders to move goods at RMB 16,430/mt, but later traders became unwilling to move goods following climbing SHFE aluminum prices, so transactions were very limited in the afternoon.

According to a SMM survey, 35% of market players were optimistic toward market outlook, believing positive medium-to-long-term spot aluminum consumption will help push up aluminum prices. 45% of market players were neutral toward market outlook for two reasons. First, the deteriorating Libyan turmoil added uncertainties to the global economic recovery, and no positive factors are expected to push up aluminum prices in the short term. Second, steady declines in spot aluminum prices have approached the purchasing costs, helping limit any declines in aluminum prices. The remaining 20% of market players were pessimistic toward market outlook, believing China’s frequent tightening monetary policies weighed down downstream consumption, which will drive aluminum prices down.

Lead

On Monday in China’s domestic lead markets, prices were up due to the coming lead futures market and strong LME lead prices, so smelters were unwilling to move goods. Many traders inquired but made limited transactions, due to declines in neighboring metals. Downstream producers held wait-and-see attitude toward the LME lead market which gained the most among all base metals, and were unwilling to accept the high lead prices, resulting in muted transactions in the morning, and well-known branded lead traded at near RMB 17,600/mt. In the afternoon, domestic lead prices were firm due to LME lead prices sharp gains, and traders and downstream producers were boosted to purchase. Transactions improved, but were still weaker than last Friday.

The simulated SHFE lead futures market rose rapidly to a high of RMB 21,030/mt after opening, with prices narrowly fluctuating between RMB 19,845-20,600/mt in the morning session. In the afternoon, prices continued to fall to a low of RMB 18,650/mt, and finally closed at RMB 18,800/mt, down RMB 1,045/mt or down 5.27%. Trading volumes were 148,898 lots, up 14,462 lots; positions were 38,760 lots, up 11,146 lots.

The long-awaited SHFE lead futures market will formally open this Thursday. 66.7% of market players are optimistic about this week’s domestic lead spot prices, believing the opening of China’s first lead futures market is definitely favorable to the lead industry. They believe the lead futures market will have the price discovery function, and will help improve the currently low domestic/LME lead price ratio. Coupled with easing nuclear radioactivity crisis from Japan earthquake, market confidence improved to an extent, the LME lead market made the largest gains among all base metals last week. Among these optimists, 60% expect domestic lead prices to be around RMB 18,000/mt this week. The rest 40% believe domestic lead prices to rise steadily, with high-end prices around RMB 17,800/mt, given lower-than-expected consumption, and given that neighboring metals’ corrections may restrict LME lead price gains.

The rest 33.3% of market players believe this week’s domestic lead spot prices to remain at around RMB 17,500/mt. Although the lead futures market is considered favorable to the lead industry, the formally launching time is near the weekend; the lead futures contracts are special, with unclear benchmark prices, and the earliest delivery time is this September, a half year later. Therefore, domestic lead price movement is still unpredictable after the launching of the lead futures market. Close attention should be paid on the Libyan situation, which will affect market confidence.

Zinc
China’s central bank announced last Friday to raise the deposit reserve ratio again and freeze RMB 362.95 billion. On Monday, SHFE 1106 zinc contract prices opened at RMB 18,230/mt, then fell to RMB 18,000/mt. With total positions increasing by over 20,000 lots in the morning trading, SHFE 1106 zinc contract prices mostly moved between RMB 17,950-18,050/mt during the day, and finally closed at RMB 18,005/mt, down RMB 230/mt, or down 1.26%. Total positions once increased by over 30,000 lots, with total positions of SHFE 1106 zinc contracts increasing by 26,990 lots to 231,016 lots, and trading volumes decreasing by over 10,000 lots to 559,530 lots. Long positions still struggled with short positions.

SHFE 1106 zinc contract prices fluctuated around RMB 18,000/mt in the morning session, and with spot discounts remaining at low levels. #0 zinc was traded between RMB 17,500-17,550/mt, with discounts of RMB 480-500/mt against SHFE 1105 zinc contract prices. #1 zinc was traded between RMB 17,450-17,500/mt. The market was cautious due to fluctuating zinc prices, and traders also stood out of the market given low discounts, leaving transactions quiet. Zinc prices in Guangdong market were higher than in Shanghai market. #0 zinc was traded around RMB17, 700/mt, with discounts of RMB 300/mt against SHFE 1106 zinc contract prices. Downstream buyers took a wait-and-see attitude, and traders were also unwilling to sell goods.

The Japanese nuclear crisis was the main factor influencing zinc prices last week. The crisis eased this week, but the Middle East unrest improved.

With regard to zinc price trends, only 10% of market players are optimistic towards zinc prices this week. Although zinc prices fluctuated at low levels previously, they found support at RMB 18,000/mt since a large number of buyers purchased at lower prices. In this context, SHFE 1106 zinc contract prices are expected to fluctuate between RMB 18,000-18,500/mt, and will unlikely fall further. Spot zinc prices should move between RMB 17,500-18,000/mt.

According to 30% of market players, Japanese reconstruction will boost demand for base metals since the nuclear crisis eased. But the Middle East turmoil improved due to western countries air attack to Libya. In this context, SHFE 1106 zinc contract prices will move around RMB 18,000/mt this week, with spot zinc prices expected between RMB 17,300-17,600/mt.

60% market players believe zinc prices will be affected this week due to Libya air attack. On the other hand, cash flows will concentrate on SHFE lead contracts which will start trading this Thursday. As a result, SHFE 1106 zinc contract prices will likely fall below RMB 17,500/mt, with spot zinc traded between RMB 17,000-17,200/mt.

Tin

On Monday in Shanghai tin markets, mainstream traded prices basically kept stable. Transactions for minor branded tin were made between RMB 196,000-197,000/mt, and tin from Yunnan Tin Group and Gejiu Zili Metallurgy Company traded between at RMB 198,000. Supply of low-priced goods was limited, but market players refused to accept the high prices, causing overall transactions muted. Despite low market supply, domestic tin prices still lack upward momentum due to currently weak transactions. Coupled with volatile LME tin prices and Libya unrest, SMM expects domestic tin spot prices may cannot rise significantly and mainly keep stable this week.

Nickel

LME nickel for delivery in three months opened at USD 25,850/mt and closed at USD 26,700/mt on March 18, up by USD 775/mt from a day earlier, with the highest price at USD 26,800/mt and the lowest price at USD 25,800/mt. China's central bank raised bank requirement reserve ratio again and unrest in Libya dampened risk sentiment, weighing on base metal prices. LME nickel futures contract for delivery in three months fell by USD 300/mt to USD 26,301/mt after opening at USD 26,600/mt during the Asian trading hours on March 21, and later fluctuated higher. LME nickel inventories were down by 252 mt to 124,848 mt on March 21.

In the Shanghai nickel spot market, transactions were quiet and wait-and-see sentiment is prevailing. Mainstream traded prices of nickel from Jinchuan Group were in the RMB 198,500-199,000/mt range, and mainstream traded prices of nickel from Russia were in the RMB 197,500-198,500/mt range.Downstream purchases were sparse, and transactions among traders were quiet. Given that price trend was not clear, not market players adopted a wait-and-see attitude and conduct transactions cautiously. Based on SMM survey on nickel price outlook, power between longs and shorts was balanced.

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