SMM Weekly Review and Forecast (Aug. 8-Aug.12)

SHANGHAI, Aug. 15 (SMM)--Last week, US credit rating was downgraded by Standard & Poor’s credit agency, significantly depressing investors’ confidence. US stocks slumped on Wednesday, as well as European and Asian stocks. Gold prices maintained strong momentum due to risk aversion appetite, and commodities have been sold off. SMMI fell 2.56% further, with SMMI.Ni down 5%, SMMI.Sn down 4.8% and SMMI.Cu down 3.5%. But SMMI.Al rebounded 0.53%, while SMMI.Pb rebounded 0.3%.

Copper:
China’s government announced on August 2nd that China’s July CPI remained high, increasing market expectations of higher interest rates. Global panic sentiment spread to China’s stock markets and caused stocks to fall, but also pushed SHFE copper prices down to RMB 63,560/mt, a loss of 8% over two weeks, and a new low for 2011.   

Volatile global stock markets will put pressure on weak Chinese stock markets, while high July CPI data has increased market expectations towards more credit tightening policies in China. In this context, SHFE copper prices will not likely regain upward momentum in the near term, with prices expected to remain between RMB 63,500-68,500/mt. 

In spot markets, tumbling prices stimulated cargo-holder interest in cash generation. The SHFE/LME copper price ratio also improved after the latest round of sharp declines, which helped increase imports of copper and improve market supply. Despite some bargain hunting, downstream producers generally stayed out of the market. Ample supply helped spot discounts expand and only middlemen with ample cash entered the market.

In spot markets, with the delivery date for 1108 copper contracts arriving on August 15th, spot copper will just be able to maintain slight premiums. Following the delivery date, transactions will remain weak due to oversupply and cautious investor sentiment toward future copper prices. As a result, copper premiums will change into discounts. Although downstream producers could replenish stocks at current low prices, they are looking for signs of stabilizing copper prices before purchasing.   

Aluminum:
Last week, SHFE aluminum prices fell initially, but rebounded later in the week. SHFE 1110 aluminum contract prices fell continuously early in the week to RMB 16,425/mt given bearish market sentiment, but later rallied to the 60-day moving average, supported by low spot aluminum inventories and long buying at lower prices, with prices closing around RMB 17,600/mt. Although China’s National Bureau of Statistics released on Tuesday that China’s CPI rose by 6.5% during July, significant declines in commodity prices ahead of China’s CPI data allowed China to delay the introduction of fresh credit tightening policies, and investor confidence improved as a result. Aluminum ingot is widely used in infrastructure construction and is very popular with investors, so SHFE aluminum prices rebounded strongly after significant declines, with aluminum becoming the first metal to stand above the 5-day moving average. 

SMM spot aluminum prices resisted declines and even rebounded rapidly, supported by the unwillingness of cargo-holders to sell goods at lower prices, reflecting confidence in the RMB 18,000/mt price point. Spot aluminum inventories in east China have fallen continuously since late July to below 300 kt, so the unwillingness of cargo-holders to sell helped spot premiums soar to between positive RMB 200-300/mt over SHFE current-month aluminum contract prices early last week when SHFE aluminum prices plummeted, with spot premiums remaining unchanged as the delivery date nears. Wide fluctuations in aluminum prices caused downstream buyers and middlemen to assume cautious positions, purchasing only on an as-needed basis. In addition, high premiums ahead of the delivery date also depressed buying interest, leaving some buyers preferring to enter the SHFE aluminum market to purchase SHFE current-month aluminum contracts for delivery rather than buying in spot markets. As a result, overall spot transactions were extremely limited.

Zinc:
Last week, US non-farm jobs and private employment data for July was better than expected, but since Standard & Poor’s downgraded the US AAA credit rating, LME zinc prices plunged to USD 2,200/mt. US stocks also continued to fall and pushed down LME zinc prices to USD 2,034/mt. Later, LME zinc prices gained back some of its previous losses as market concerns eased. On Wednesday, rumors spread that France’s credit rating would also be downgraded, but was refuted by Standard & Poor’s and Moody’s. LME zinc prices generally moved between USD 2,100-2,200/mt.

SHFE three-month zinc contract prices fell sharply, with prices opening below RMB 17,000/mt on Monday and falling by the daily limit to hit a record low RMB 15,690/mt. But as a large number of shorts left the market after profit-taking, SHFE zinc prices rallied to RMB 16,000/mt. Later in the week, SHFE zinc prices edged up to the 5-day moving average, moving between RMB 16,700-16,800/mt.

In domestic spot markets, spot zinc prices fell along with SHFE zinc prices, but with discounts remaining between negative RMB 200-250/mt. Downstream buyers were aggressively replenishing stocks, although traders were holding goods and arbitragers were actively closing positions. Some smelters were also buying goods as spot zinc prices fell lower than smelting costs. Spot zinc prices fluctuated between RMB 15,600-16,300/mt. As SHFE zinc prices rose and spot goods were consumed, goods available in the market fell steadily, causing spot discounts to narrow to negative RMB 150-160/mt. Cargo holders were also unwilling to sell goods due to optimistic speculation.

Lead:
SHFE 1110 lead contracts became the most actively-traded contract in mid-week, but tumbled along with falling LME lead prices. Three-month delivery contract prices briefly fell to RMB 15,200/mt, a record low since its launch, but rallied above RMB 16,000/mt in mid-week and with support from the 5-day moving average. SHFE lead prices are expected to move between RMB 16,250-17,000/mt this week.
 
In China’s domestic spot market, prices briefly slid to RMB 15,400/mt, causing smelters to hold goods since lead prices below RMB 16,000/mt are below the production cost line. As lead prices finally stabilized, downstream producers and traders both made purchases at low prices, causing prices to quickly rebound above RMB 16,000/mt. No goods were available at prices below RMB 16,000/mt, and prices of well-known branded lead returned to around RMB 16,100/mt, with spot discounts over SHFE 1109 lead contract between negative RMB 250-300/mt. Supply in domestic spot markets is down as sharp price declines dampened smelter interest in selling goods. In addition, some lead-acid battery producers have now resumed production as peak demand period for batteries nears, which will stimulate lead demand and support higher lead prices. Spot discounts over SHFE 1110 lead contracts will remain between negative RMB 300-400/mt, while spot lead prices should be between RMB 16,100-16,600/mt this week. 

Tin:
Domestic tin prices showed a stabilizing trend during the week following previous plunge. SMM average tin price on August 12th was RMB 192,750/mt, down RMB 9,750/mt from previous week. Mainstream trading brands were Yunxi, Yunheng, Nanshan and Kaiyuan. Most smelters were holding goods, and some supplies with loss reported were also stopped. As a result, market supply was relatively tight during the week, which limited downward space of tin prices. Market transactions were sluggish at the beginning, but gradually improved following rebound of LME tin prices. Domestic tin prices also began to rebound after hitting RMB 190,000/mt. Meanwhile, with LME tin prices falling by over 20% during the past two week, which compared to a relatively slow downward pace of domestic tin prices, import margin appeared as a result of price gap. Though quotes of tin futures from Indonesia and Malaysia were heard in domestic tin markets, transactions were rarely reported.

Nickel:
Last week, LME nickel prices initially slumped, but later rebounded. Jinchuan Group cut ex-works nickel prices three times by a total of RMB 17,000/mt. As LME nickel prices fell, spot nickel prices recorded their largest intraday decline of RMB 11,250/mt on Tuesday. However, spot nickel prices rebounded on Wednesday to RMB 165,000/mt as LME nickel prices stabilized on Tuesday evening. On Thursday, a growing wait-and-see attitude amidst volatile LME nickel price movements sent spot nickel prices lower. The average weekly price of SMM #1 nickel was RMB 165,900/mt, down RMB 13,450/mt from a week earlier.

Transactions in the Shanghai nickel spot market were relatively quiet. Slumping LME nickel prices triggered panic sentiment during the first half of the week, with spot transactions also turning sluggish. Transactions on the Wuxi Electronic Exchange futures market were brisk as volatile price movements attracted many traders, which also dampened transactions in spot markets. Later in the week, traders were still cautious and trading sentiment was quiet amid volatile prices, despite the rebound in LME nickel prices. 

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