SMM Weekly Review and Forecast (Aug. 15-Aug.19)

SHANGHAI, Aug. 22 (SMM) –Last week, gold prices set a new record high above USD 1,800/oz amid uneven economic data in all countries, and since the ongoing European debt crisis stoked investor fears over another global recession. Although the Dow Jones Industrial Average began to improve slightly after significant declines, base metals prices continued to fluctuate. SMMI fell 0.96%, with SMMI.AL, SMMI.NIi and SMMI.Zn leading the declines, down 2.16%, 1.54%, and 1.07%, respectively, but only SMMI.Sn rebounded 1.43%.     
  
Copper
In domestic markets, China’s Central Bank announced it will make commodity price controls its main priority. A surge in the central bank bills yield highlighted the government’s commitment to tighten monetary measures. As high inflation persists in China, expectations of interest rate increases are growing, but analysts expect the statutory deposit reserve requirement ratio will be left unchanged. As Chinese stock markets will likely lose 2,600 points, and since the whole financial markets are cautious, SHFE daily copper prices will fluctuate in a wider range. Despite upward technical indicators, the seasonal low demand period and cautious investor sentiment will dampen demand for copper. In this context, SHFE copper prices will fluctuate in the RMB 65,500-68,000/mt range, tracking movements in LME copper.     

Last week, despite buying interest at low price levels, price volatility actually depressed purchase volumes, with downstream producers continuing to buy on an as-needed basis. Speculative trader buying interest was depressed due to high premiums and no opportunity of hedge trading, keeping market transactions quiet. 

In spot markets, copper supply will grow in the coming week as more imported copper will be available due to the improved SHFE/LME copper price ratio. As the RMB continued to appreciate, cargo-holders of imported copper were active moving goods to generate cash, so premiums for domestic copper will not stay high in the coming week. Downstream producers will make purchases on an as-needed basis, but market transactions will improve once copper prices stabilize. 

Aluminum
SHFE 1111 aluminum contract prices edged lower after SHFE 1111 aluminum contracts became the most actively traded contract on Monday due to the situation where stronger near-term contracts and weaker forward contracts prevailed in the SHFE aluminum market. Daily trading volumes of SHFE 1111 aluminum contract were below 150,000 lots due to cautious trading sentiment, and most deals were made by investors in an attempt to minimize risks, with prices mainly moving between RMB 17,000-17,450/mt over the past week. Low spot aluminum inventories helped support SHFE aluminum prices, but a lack of confidence caused investors to mainly made short-term transactions, which dampened upward momentum in SHFE aluminum prices. In this context, SMM expects SHFE aluminum prices to find support at RMB 17,000/mt in the short term.

Cargo-holders were reluctant to sell goods due to tight supply and since spot aluminum prices fell below RMB 18,000/mt early last week. As a result, spot aluminum premiums surged to positive RMB 200/mt over SHFE current-month aluminum contract prices after transitioning into a new contract month, which helped spot aluminum prices remain stable above RMB 17,700/mt. However, downstream buying interest was still low and most downstream consumers stayed out of the market once aluminum prices climbed above RMB 17,800/mt, keeping trading sentiment muted. 

Zinc
Last week, Japan’s positive economic results for Q2 boosted market confidence, while US housing starts were down only 1.5%, also better than expected. However, weaker GDP figures throughout the Euro zone and in Germany later depressed market sentiment. In addition, the lack of Franco-German consensus on the Euro-zone debt issue kept investors cautious. LME zinc prices failed to break through USD 2,200/mt, moving instead between USD 2,150-2,220/mt, but edging up to the 5-day moving average.

SHFE 1111 zinc contract became the most actively traded, with prices attempting to break through the RMB 17,000/mt level using upward momentum from LME zinc prices. However,  SHFE 1111 zinc contract prices fell on Tuesday due to expectation of further interest rate increases in China, pushing prices down to an intraday low of RMB 16,545/mt. On Thursday, prices rebounded and broke through RMB 17,000/mt, later moving between RMB 17,000-17,300/mt.

In domestic spot markets, rising zinc prices boosted market confidence, despite low transaction activity. Some optimistic cargo holders were unwilling to sell stocks, causing spot discounts against SHFE 1111 zinc contract prices to contract to negative RMB 200-250/mt. With traded prices for spot zinc between RMB 16,600-16,950/mt, smelters were attracted by the lower-than-cost prices. 

Lead
Last week, SHFE 1110 lead, the most active contract, fluctuated in the RMB 16,400-16,800/mt range. On Tuesday, SHFE lead prices fell by RMB 280/mt after China’s Central Bank issued bills with higher yields. In mid-week, SHFE lead market recouped some previous losses, but still lacked upward momentum. This week, SHFE lead prices are expected to move between RMB 16,200-17,000/mt

In the domestic spot markets, prices moved in the RMB 16,050-16,350/mt range. Early in the week, spot prices rallied near RMB 16,300/mt with rising LME lead prices, but fell back on Tuesday to RMB 16,050-16,150/mt due to weak futures market prices. Spot prices later rebounded to RMB 16,300/mt, but slid back to RMB 16,050-16,250/mt on Friday due to falling LME lead prices, with spot discounts over SHFE 1110 lead contract between negative RMB 350-400/mt. Spot lead prices will fluctuate in the RMB 16,000-16,400/mt range this week, but may fall below RMB 16,000/mt.

Tin
Spot tin prices in China hit RMB 198,000/mt during the week starting from August 15th, but dropped on August 19th to RMB 194,500-196,500/mt. At the beginning of the week, with a stabilizing trend of LME tin prices during previous week and remaining limited supply, spot tin prices in China rebounded quickly to RMB 196,500-198,000/mt. However, as continuous sluggish transactions caused by weak downstream consumption eroded upward momentum of spot tin prices, and LME tin prices turned sluggish again during the week, goods holder confidence fell, which led spot tin prices downward in China. On August 19th, following a plunge of LME tin prices during previous day, spot tin prices quickly fell to RMB 194,000-196,000/mt. Market supplies remained limited during the week, due to falling tin prices as well as tight raw materials supply, power restrictions etc. at smelters. Market demand was also sluggish due to lower operating rates and order volumes at weld tin producers caused by tight capital supply, power restrictions, slowing economic recovery etc. Therefore, the conventional peak season is expected to come later this year.

Nickel
Shanghai nickel spot prices still lingered near Jinchuan ex-works nickel price of RMB 164,000/mt. Since LME nickel prices were relatively stable early last week, domestic spot nickel prices did not fluctuate much. However, last Thursday’s slump in LME nickel prices dragged down spot nickel prices, with mainstream traded prices for domestic spot nickel   RMB 162,000-163,500/mt on Friday. The average weekly price of SMM #1 nickel was RMB 164,620/mt, down RMB 1,280/mt from a week earlier.

Overall trading sentiment was sluggish, with traders largely adopting a wait-and-see attitude. LME nickel prices still struggled below USD 22,000/mt, dampening market confidence and depressing transactions. Few downstream consumers entered market, so deals were largely made among traders. The price spread between Jinchuan and Russian nickel expanded due to the arrival of large amounts of Russian nickel from the improved domestic/LME nickel price ratio. Russian nickel holders were eager to generate cash at lowered prices, expanding the Russian and Jinchuan nickel price gap.