SMM Weekly Review and Forecast (Jul. 11-Jun.15)

SHANGHAI, Jul. 18 (SMM)--Last week, the US economic recovery dominated the market, leading the US dollar index trends. The number of US non-farm jobs increased 18,000, the smallest increase since September 2010, and much lower than forecasts. The US dollar index fell to 75 on speculation that QE3 monetary policies may be implemented by the US Federal Reserve if the US economy remains sluggish. In this context, the SMMI rose 0.08％, with SMMI.Sn up 2.63% and SMMI. Pb coming in second to rise 0.36%. But SMMI.Cu fell slightly by 0.3％.

Copper:
Last week, the National Bureau of Statistics (NBS) announced China’s fixed assets investment increased 25% YoY, suggesting continued robust economic and rapid investment growth in China. Besides, inflationary pressures are still high and raw material prices are not expected to fall.

China’s Shanghai Composite Index returned above 2,800 points, lifted by positive domestic economic results announced on Wednesday. SHFE copper prices moved higher, reaching a weekly high of RMB 72,460/mt. SHFE copper prices will continue to move higher, while consolidating at RMB 71,000/mt, with prices expected between RMB 71,000-73,000/mt in the following week.

In the spot market over last week, traded prices gained more than RMB 1,000/mt compared with a week earlier. Downstream producers continued to stand on the sidelines due to high prices, spot copper discounts failed to fall significantly, with mainstream discounts reported between negative RMB 150-50/mt. With the approach of delivery date, the unwillingness from cargo-holders reduced market supply, keeping offers firm, while traders took the opportunity to enter into the market for hedge trading, with overall supply exceeding demand. The seasonal low demand period from July to August will restrict copper price gains. Enterprises are more inclined to use scrap copper as raw material since the price gap between scrap and refined copper has grown to RMB 2,500/mt. SMM believes SHFE copper prices will move higher with rising LME copper prices, but the rate of growth of SHFE copper prices will be slower than LME copper. 

In the spot market in the upcoming week, traded deliveries will be completed in the coming week. Copper discounts will likely increase as cargo-holders cannot maintain offers. Downstream producers are still cautious towards higher prices and will make deals on an as-needed basis during the seasonal low demand period. Trader buying interest will also fall after the delivery date, so SMM believes spot copper discounts will remain next week. 

Aluminum:
SHFE 1109 aluminum contract prices frequently tested RMB 17,400/mt for two consecutive weeks, but failed to break through due to heavy short selling. Although China’s 2Q GDP grew slower than 1Q, indicating China’s tightening monetary policies have taken effect, but inflationary pressures remain heavy, and whether or not China’s CPI will grow slower in 2H 2011 remains unknown. Weakening inventor sentiment dampened upward momentum in SHFE aluminum prices, with the highest SHFE prices only hitting RMB 17,440/mt. Daily trading volumes were only about 20,000 lots, and SHFE 1109 aluminum contract prices continued to fluctuate between RMB 17,200-17,400/mt. On Friday, the recovery of long confidence helped push up SHFE aluminum prices to break through RMB 17,600/mt, with prices hitting a recent high, but growing pressures caused SHFE aluminum prices to trim some gains later.  

Spot aluminum prices in Shanghai rebounded after falling slightly early last week, and although spot prices failed to return above RMB 17,600/mt, strong support was still found at RMB 17,500/mt. SHFE aluminum prices fluctuated widely as the delivery date neared, prompting buyers to take a wait-and-see attitude and dragging down premiums for spot aluminum over SHFE current-month aluminum contract prices. Cargo-holders remained unwilling to move goods at lower prices for cash. As a result, spot aluminum transactions were limited. On Friday, SHFE aluminum prices soared during spot aluminum trading hours, causing spot aluminum prices to be mixed. Cargo-holders’ unwillingness to move goods pushed up spot aluminum prices to above RMB 17,600/mt, but low buying interest kept market transactions sluggish.

Zinc:
Last week, the US economic recovery dominated the market. The number of US non-farm jobs rose by only 18,000 in June, the smallest increase since September 2010 and much lower than forecasts. In this context, the US dollar index rose over three consecutive days to hit 76.7 on Tuesday, pushing down LME zinc prices to USD 2,302/mt, although prices later rallied. The US dollar index fell to 75 on speculation that QE3 monetary policies may be implemented by the US Federal Reserve if the US economy remains sluggish. In this context, LME zinc prices rallied slightly, but still struggled at USD 2,400/mt.

SHFE 1109 zinc contract prices tracked LME zinc prices, falling below the 10-day moving average to RMB 17,800/mt, but later rallying to RMB 18,000/mt. Spot transactions were mainly made among traders, with traded prices between RMB 17,600-18,000/mt. Spot discounts expanded to negative RMB 350-400/mt as SHFE zinc prices rose. Spot discounts against spot-month zinc contract prices also grew as the delivery date neared, presenting an opportunity for traders buying spot zinc and selling SHFE zinc contracts.

Next week, economic recovery in Europe and the US will be the market focus. A number of Euro-zone countries have had their credit ratings downgraded, and there is no official word on whether or not the US will continue QE3. In this context, the US dollar index should fluctuate between 75 and 76, and LME zinc prices should break through USD 2,400/mt. SHFE 1110 zinc contracts will become the most actively traded. LME zinc prices should rise to RMB 18,500/mt, with spot discounts expanding to negative RMB 400-600/mt.

Lead:
SHFE lead prices were between RMB 17,050-17,250/mt in early week trading, then rose to RMB 17,700/mt in mid-week, with a daily gain of RMB 510/mt, or 2.97%. Over the weekend, SHFE lead prices erased pervious gains and moved down to RMB 17,550/mt. SMM expects SHFE lead prices to fluctuate between RMB 17,000-17,900/mt this week.

In China’s domestic lead spot markets, well-known branded lead mainly traded between RMB 16,720-16,800/mt in early week trading. Other brands such as Hongwu, Jinguan, and Shuikoushan brands traded between RMB 16,620-16,700/mt, with spot discounts narrowing from RMB 600/mt two weeks ago, to RMB 350-500/mt. In mid-week trading, production suspensions at smelters in Henan province, as well as gains by SHFE lead, pushed spot prices  above RMB 17,000/mt. In response, spot discounts expanded to RMB 500-550/mt. Traders were unwilling to sell goods due to smaller arbitrage profits, while downstream producers refused to purchase at higher prices. In general, transactions last week were only moderate.

Smelters in Henan province have cut output due to environmental protection inspections, and the resulting lower market supply supported spot prices. Traders were largely unwilling to sell goods due to bullish sentiment, and coupled with production cuts in Henan province, SMM expects spot discounts will narrow to RMB 400-500/mt and lead spot prices to be RMB 16,800-17,300/mt this week. Some downstream producers restarted production, but purchased only cautiously at current high prices, keeping transactions muted.

Tin:
In China’s domestic tin spot markets, prices were mainly above RMB 200,000/mt last week, with the average price on SMM at RMB 202,250/mt last Friday, up RMB 3,750/mt from two weeks ago. Market supply consisted mainly of tin from Yunnan Tin Group, Yunheng and Yunxiang brands etc., with other brands limited. Continuous environmental protection inspections and power restrictions in Jiangxi, Hunan and Guangdong provinces led to production cuts or even suspensions, negatively affecting normal sales. Coupled with low selling interest, market supply reduced further. Trading volumes kept stable, but the rapidly rising prices triggered strong wait-and-see sentiment among downstream producers, combined with low demand and tight capital, most downstream producers were only purchasing on an as-needed basis. In general, low market supply and strong LME tin prices should support domestic tin spot prices.

Nickel:
With support from Jinchuan Group's increase in nickel prices to RMB 172,000/mt on July 8th, Shanghai nickel spot prices were stable around RMB 172,000/mt last week. The average weekly price of SMM #1 nickel was RMB 172,450/mt, up RMB 3,560/mt. As a result of last Monday’s significant decline in LME nickel prices, spot nickel prices fell sharply on Tuesday, depressing trading sentiment, which resulted in cautious and quiet transactions. Later, LME nickel prices rebounded to above USD 24,000/mt as the US dollar moved lower, which also pushed up spot nickel prices to between RMB 173,500-175,000/mt on Thursday. As LME nickel prices advanced, Jinchuan Group raised ex-works nickel prices to RMB 174,000/mt last Friday. LME nickel prices fluctuated wider given recent mixed economic news, which also dampened cargo-holder confidence. Markets were generally pessimistic, with traders only replenishing stocks while maintaining a wait-and-see attitude.

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