SHAGNHAI, Jul. 25 (SMM) –Market still focused on the European debt crisis over the past week, dampening market sentiment and helping the US dollar index rebound. However, the euro moved significantly higher later, as market worries eased after the EU summit reached on an agreement for a Greek bailout plan last Thursday. Market also eyed closely on last week’s US debt ceiling negotiations, which were highly expected to be passed. China’s CPI data fell to its 28-month low, suggesting a slowdown in the manufacturing sector, and also weighing on the market. As a result, base metals prices fell after initially increasing. The SMMI only increased by 0.37%, with SMMI.Zn increasing 1.68%, and SMMI.Pb coming next to rise 1.18%. SMMI.Cu only inched down 0.15%.
SHFE copper prices also moved higher to RMB 72,980/mt, but met resistance at RMB 73,000/mt due to profit-taking by longs. The HSBC China PMI for July fell below 50 and China’s Shanghai Composite index slid by nearly 2% in response, cutting price gains in the SHFE copper market. As of Thursday, SHFE copper prices were up only 0.5%, with trading volumes and positions both down. The shifting of the most actively-traded copper contract in the SHFE market was slow, a sign of a strong wait-and-see attitude, which kept SHFE copper weaker than LME.
SHFE copper prices will continue to test RMB 73,000/mt. Construction of hydro-electric power projects and affordable housing outlined in the 12th Five-Year Plan should boost domestic demand for copper and set the stage for new highs for copper prices during 4Q or in 2012. In the short term, weak movements in domestic stock markets and lack of cash flows will restrict room for rising copper prices.
In the spot market, copper discounts have gradually increased to negative RMB 400-300/mt due to oversupply in the market. Traded prices struggles at RMB 72,000/mt, dampening any further gains in the SHFE copper market, so LME copper prices will remain stronger than SHFE copper prices. Cash flows will tighten in the coming week as the month ending, so cargo-holders are expected to move goods to generate cash, which should increase market supply. A widening price gap between refined and scrap copper will depress downstream consumption, and with stronger forward-month contract prices, middlemen will be unable to make hedging trades unless spot discounts expand. In this context, market inventories will grow in the short term and spot discounts will not fall significantly, keeping transactions sluggish.
Transactions on the SHFE aluminum market were brisk last week, with daily trading volumes above 40,000 lots early last week amid strong long momentum, and SHFE 1110 aluminum contracts successfully became the most actively traded contracts on Tuesday. SHFE aluminum prices climbed at first but moved down later in the week. Selling pressure became stronger when SHFE 1110 aluminum contract prices were close to RMB 17,800/mt, and this strong selling pressure in turn dragged down SHFE 1110 aluminum contract prices, but left low-end SHFE aluminum prices still firm at RMB 17,500/mt. Technical indicators show that SHFE aluminum prices will gain upward momentum after falling back in the short term.
Because of industrial transformation, most aluminum producers sold goods on long-term contracts or in the form of aluminum liquid, which greatly reduced the supply of spot aluminum ingot to east China, and spot aluminum inventories continued to fall as a result. Strong unwillingness by cargo-holders to sell goods helped boost spot aluminum prices in Shanghai from RMB 17,700/mt, to RMB 17,800/mt. Although buying interest was low, suppliers were still able to influence prices in spot aluminum markets due to extremely limited supply. Overall transactions were limited.
Last week, the US dollar index fell from 75.7 to 74.5. Debt crises in the Euro zone and a slowing US economic recovery still dominated markets. US industrial yields in June rose 0.2%, in line with forecasts, and boosting LME zinc prices to break through USD 2,400/mt early last week. LME zinc prices surged to USD 2,491/mt Monday as LME zinc canceled warrants increased by over 30 kt, but then fell to USD 2,430-2,450/mt since markets were still cautious ahead of the EU summit called to resolve the Greek debt issue.
SHFE 1110 zinc contract prices became the most actively traded, with prices touching RMB 18,910/mt on Wednesday and tracking LME zinc prices. However, SHFE 1110 zinc contract prices opened low and fell to RMB 18,500/mt on Thursday on news that HSBC’s China PMI for June was down to 48.9. In domestic spot markets, discounts expanded with rising SHFE zinc prices, with discounts against SHFE 1110 zinc contract prices growing to negative RMB 350-450/mt. Traders were aggressively buying spot zinc and selling SHFE zinc contracts, with traded prices between RMB 18,250-18,370/mt. Spot zinc prices then fell to RMB 18,150-18,200/mt in tandem with SHFE zinc prices. Downstream buyers purchased modestly at lower prices, with most transactions mainly among traders.
With positive sentiment from the Euro zone summit and US debt ceiling talks, the US dollar index is expected to fluctuate around 74 in the coming week. Meanwhile, declines in LME lead stocks slowed, even showing signs of growth, which should limit any price increases. However, LME lead prices still have technical upward momentum, and in general, positive factors still dominate the market. SMM expects LME lead prices to fluctuate between USD 2,650-2,800/mt in the coming week. SHFE lead prices followed LME lead movements, hitting RMB 17,815/mt last Wednesday, the record high since late April and above all daily moving averages. On Thursday, SHFE lead prices fell below the 5 and 10-day moving averages as Chinese stock prices fell, falling below RMB 17,500/mt, erasing earlier gains. SHFE lead prices are expected to be RMB 17,300-17,900/mt, with strong resistance felt at RMB 18,000/mt.
Smelter operating rates did not improve last week due to ongoing environmental protection inspections. Smelters were unwilling to sell goods due to the rising LME lead prices, limiting market supply, pushing up spot lead prices above RMB 17,000/mt in early week trading, and as high as RMB 17,260/mt for well-known branded lead. SHFE lead prices began to fall on Thursday, dragged down spot prices as well to around RMB 16,950/mt, but with offers for Chihong and Nanfang brands remaining above RMB 17,000/mt. Spot discounts remained unchanged at negative RMB 400-500/mt. Downstream producers were purchasing cautiously due to high lead prices, but remained on the sidelines even as LME prices fell in mid-week. . The Shaoguan smelter restarted production but has not had any significant effect on market supply. Coupled with continuous production suspensions at smelters in Henan province, lead spot prices remained comparatively stable, and traders were largely optimistic about the future market outlook and restricted their sales. However, downstream producers purchased only modestly due to the high prices and due to limited resumption in production. In this context, SMM expects spot discounts will remain at RMB 400-500/mt, and domestic lead spot prices will be between RMB 16,800-17,300/mt in the coming week.
Domestic spot tin prices maintained a rising trend during the week from July 18th – 22nd. SMM average tin price on July 22nd was RMB 204,250/mt, up RMB 2,000/mt from the previous Friday. Earlier during the week, fluctuating LME tin prices weakened upward momentum of domestic tin prices which were already weak due to weak consumption. However, after LME tin prices maintained a rising trend and broke through USD 28,000/mt, domestic tin prices also maintained a rising trend as a result of higher prices by smelters and rare supply. Market supply during the week remained limited, mainstream traded brands were Yunxi, Yunheng, Yunxiang, Jinlong and Nanshan. Branded tin from Jiangxi and Guangdong smelters were also seen, but with smaller supply volume compared with the previous week. Overall market sentiment remained sluggish. Continuous rising prices also pressed buying interest lower, with stronger wait-and-see attitude among downstream buyers.
After Jinchuan Group raised nickel prices to RMB 174,000/mt on July 15th, Shanghai nickel spot prices rose rapidly to RMB 174,000/mt. As LME nickel prices stabilized at around USD 24,000/mt, spot prices were able to advance to between RMB 174,800-175,500/mt last Thursday. The narrowing price spread between Jinchuan nickel and Russian nickel was not favorable for nickel imports, so supply of Russian nickel was limited, which kept prices for Russian nickel relatively firm. In contrast, sales of Jinchuan nickel were not strong given the lack of clear market trends. Nickel prices on the Wuxi Electronic Exchange were relatively high, and many traders took advantage of arbitrage opportunities. As a result, supply of spot nickel was lower and trading sentiment was lackluster in spot markets. Trading sentiment further softened last Thursday as LME nickel prices struggled at USD 24,000/mt and dampened trader confidence.