SMM Weekly Review and Forecast (Jun. 20-24)

SHANGHAI, Jun. 27 (SMM) -- The progress in solving Greek debt crisis and the results of US Federal Reserve meeting became major factors dominating markets last week. Although the Greek government won the vote of confidence early last week, whether or not the government can obtain the economic rescue package through austerity measures remains uncertain. The US Federal Reserve announced last Thursday to keep benchmark interest rates unchanged, cut its forecast of US economic growth in 2011 and other important economic data, and admitted that the US economic recovery is slow, driving the US dollar index higher but weighing down commodity markets. Expectations of interest rate hike in China increased, and stock markets were weak as well. As a result, base metal prices were weak. SMMI was down by 0.36%, and nickel was the worst performer among base metals, with SMMI.Ni falling significantly by 1.83%. Lead and aluminum prices rallied, with SMMI.Al and SMMI.Pb rising by 0.76% and 0.31%, respectively.

Copper:
Last week, China’s domestic stocks market were down along with reignited concerns over a possible interest rate hike, which then pushed down SHFE copper prices. SHFE copper prices fell over 1%, with the low-end of the price range settling at RMB 67,000/mt. The SHFE copper market saw a shift in the most actively-traded copper contract during the past week.

In the coming week, SHFE copper prices will test RMB 67,000/mt, but momentum will remain weaker than LME copper prices. China’s National Development and Reform Commission expects June’s CPI to be higher than May, adding to worries over further credit tightening measures. After several increases in the reserve requirement ratio, availability of capital and cash flows is becoming problematic. Coupled with the end of the quarter, liquidity will tighten further, and in this context, domestic stocks markets will fall and SHFE copper prices will move lower to RMB 67,000/mt. 

In the following week, market supply will remain ample since cash flow pressures are stimulating sales to generate cash. In response, spot premiums will narrow further. Domestic copper smelters, however, will take a more cautious view towards sales due to lower premiums. Larger copper processing enterprises will continue to purchase goods at lower prices, while small and medium-sized copper processing enterprises will stay out of the market due to tight cash flows. Spot market transactions are not expected to improve in the coming week.

Aluminum:
Falling domestic spot aluminum inventories and rising costs helped push up expectations of higher aluminum prices. The withdrawal of short investors helped SHFE aluminum prices rebound early last week, with SHFE prices standing above RMB 17,000/mt successfully on Friday. In contrast to LME aluminum prices, SHFE aluminum price were stronger recently due to higher costs.

Spot aluminum inventories continue to fall. Cargo-holders’ unwillingness to move goods helped support aluminum price to climb from RMB 17,020/mt to RMB 17,100/mt last week, with mainstream aluminum prices rising continuously. Aluminum producers reduced shipments, and spot aluminum inventories fell continuously in response, helping push up market expectations of higher prices. Cargo-holders moved goods aggressively at higher prices, but became unwilling to move goods once prices fell below a psychological price limit. Early-June discounts for spot aluminum over SHFE current-month aluminum contract prices turned into premiums by the end of the month. Downstream processors still made purchases on an as-needed basis, since continuously rising aluminum prices depressed downstream buying interest. As a result, spot transactions were weak over the past week.

Lead:
In early week trading, SHFE lead prices fell to touch a one-month low of RMB 16,455/mt after nine straight days of declines. In mid-week, SHFE lead prices began to rebound and closed up RMB 325/mt, or 2.31%, helping make up previous losses. SHFE lead prices met strong resistance at above RMB 17,000/mt, however, and fell back slightly. SMM expects SHFE lead prices to move between RMB 16,800-17,200/mt in the coming week.

In China’s domestic lead spot markets, traded prices for well-known branded lead fell to RMB 15,880/mt in early week trading, dragged down by weak SHFE lead prices, and with spot discounts at negative RMB 600-650/mt. With lead prices below RMB 1,600/mt, downstream producers increased purchases, but by Wednesday, traded prices for well-known branded lead returned above RMB 16,000/mt, with spot discounts expanding to RMB 650-700/mt, making traders cautious. Without month-end cash flow pressures, smelters were unwilling to sell goods at lower-than-expected price levels. Only a few lead-acid battery producers have restarted production, but will not have any significant effect on spot prices. Meanwhile, smelters will become more active in selling goods to generate cash as the end of the month approaches, so SMM expects domestic lead spot prices will fluctuate between RMB 16,000-16,300/mt in the short term.

Zinc:
Last week, the ongoing Greek debt crisis was still the focus of markets, with market players cautious before a financial bailout package was announced. The US dollar index continued to rise, pushing down LME zinc prices to USD 2,157/mt. Once the new Greek cabinet received a vote of confidence, LME zinc prices rallied to USD 2,250/mt.

SHFE 1108 zinc contract prices remained stable overall, but were down to RMB 16,920/mt on Monday, tracking LME zinc prices overnight, but then surged to RMB 17,290/mt on Thursday along with a rising Shanghai Stock Exchange composite index.

In domestic spot markets, spot transactions were quiet due to tight cash flow problems. Spot discounts against SHFE 1108 zinc contract prices were between RMB 80-120/mt, with traded prices between RMB 17,000-17,100/mt. Downstream buyers were also cautious due to tight cash flows, while traders also took a wait-and-see attitude even as spot discounts expanded to RMB 160/mt on Thursday. Some imported zinc was actively traded to generate cash, with major brands including AZ, YP, and Korean #2 zinc. Traded prices of imported #0 zinc were RMB 80-100/mt lower than domestic #0 zinc, leaving domestic zinc markets quiet.

Tin:
Last week, prices in Shanghai tin spot markets largely kept stable, with prices in Yunnan slightly down. The average weekly price was RMB 192,500/mt, down RMB 1,500/mt from a week earlier. Prices for brands from Jiangxi and Hunan provinces basically kept stable due to stabilizing LME tin prices, with mainstream prices between RMB 191,000-191,500/mt. The continuously weak consumption forced major branded tin smelters to cut ex-works prices, keeping low-end prices around RMB 191,000/mt, but high-end prices were constantly falling, with price gap between different brands narrowing. SMM believes domestic tin spot prices may stop falling if LME tin prices manage to stabilize around USD 25,000/mt, otherwise, domestic tin prices should fall further over the near tem.

Nickel:
LME nickel prices were relatively stable last week, but domestic spot prices continued to move lower. The weekly average price for SMM #1 nickel was RMB 165,120/mt, down RMB 6,040/mt from a week earlier. Jinchuan Group unexpectedly cut ex-works nickel prices on Monday by RMB 3,000/mt, to RMB 164,000/mt, dampening market sentiment and dragging down spot prices to RMB 164,000/mt. The price gap between Jinchuan and Russian nickel expanded to RMB 2,500/mt, up significantly from the RMB 1,500/mt gap a week earlier. As of last Thursday, traded prices of nickel from Jinchuan Group were around RMB 165,000/mt, while prices for nickel from Russia were around RMB 162,500/mt. The sharp price drop for Russian nickel was due to an oversupply since a positive domestic/LME nickel price ratio created opportunities for imports, flooding the market.

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