SMM Daily Review - 2011/8/22 Copper Market

SHANGHAI, Aug. 23 (SMM) –SHFE 1111 copper contract prices, the most active one, opened slightly up RMB 150/mt at RMB 66,350/mt on Monday, tracking LME copper prices to fall after initially increasing during the whole trading day. Due to resistance at RMB 67,000/mt, SHFE three-month copper contract prices gained the falling pace after the major trading hours in the morning business。 As China's Shanghai Composite Index slid near 2,500 points, SHFE three-month copper contract prices reversed the earlier gains at the tail of trading, falling to a low RMB 65,900/mt. Finally, the most actively-traded copper contract prices closed at a recent low RMB 65,910/mt, down RMB 290/mt or 0.44%. Positions for the most actively-traded copper contracts were down 1,068 lots, while trading volumes were up 4,594 lots. Based on data, the daily trading volumes for SHFE copper were down for a fourth consecutive day, and mid-term speculative funds also had signs of withdrawing the markets. As a result, SHFE three-month copper contract prices were expected to remain fluctuating in the short term, with strong resistance at the daily moving average. 

In spot markets, SHFE copper prices rebounded in the morning business, but firm quotation from cargo-holders made offers at premiums of positive RMB 100-180/mt, nearly flat with last Friday levels. Later, as SHFE copper prices slid, copper premiums slightly increased, reporting at positive RMB 120-220/mt near the midday. Trade prices for standard-quality copper were between RMB 66,950-67,080/mt in the morning business, and RMB 67,000-67,200/mt for high-quality copper. Downstream producers generally stayed out of the market, highlighting the characteristic of cautious trading sentiment on Monday, and keeping market transactions muted. Copper premiums fell due to weak consumption, although SHFE copper prices dropped further. As standard-quality copper was rarely seen in markets, its traded prices already declined to RMB 66,550-66,750/mt. High-quality copper premiums were at positive RMB 180-200/mt, and traded prices were at 66,600-66,800/mt. Overall market transactions were limited. 

SMM conducted a survey on copper outlooks this week.

Based on the survey, about 67% of the surveyed market players believed copper prices will fluctuate further, with LME copper prices expected between USD 8,700-8,950/mt and SHFE copper prices estimated between RMB 66,000-67,500/mt, nearly flat with the prior week. Although cautious sentiments will restrict the rising momentum, there will be limited downward room for copper prices, and due to the following reasons. First, market expectations towards QE3 are growing, and the US dollar will remain weak, which will support copper prices. Second, Although gold prices have been setting new record highs due to risk aversion sentiment, fears that it will trigger global inflation are increasing. Third, as the SHFE/LME copper price ratio improves recently, RMB appreciation propelled Chinese traders in spot markets to actively make quotations, which helped support the low-end LME copper prices and will increase confidence for copper prices. Third, due to cautious sentiment from domestic speculators, positions and trading volumes are recently down, and longs and shorts mainly are making intraday transactions, resulting in wide price fluctuations during the trading day. However, copper prices will lace rising momentum in the mid-term but will fluctuate in a narrow range. Fifth, in spot markets, as copper prices fail to increase, trader's unwillingness in moving goods is growing, and some traders have reduced goods below RMB 66,500/mt, while downstream producers are making purchases at low prices. Recent firm spot premiums are a signal of copper price support from spot markets. In summary, copper prices will fluctuate in this week.            

The remaining 33% market players believed copper prices will fall this week. They believed LME copper prices will hardly hold at RMB 8,600/mt, and SHFE copper prices will fluctuate in the RMB 65,000-66,000/mt range. There have been disputes over the US economic growth, the European countries are troubled with their heavy debts, and Japan's economy will not easily recover, triggering a gloomy sentiment towards global economic prospects. Besides, Morgan Stanley and Goldman Sachs are placing a pessimistic outlook on further US economy, with Morgan Stanley stating that the US will likely slip into another recession in the coming year, while Goldman Sachs also downgraded the second-half US growth in its report last Friday. Markets estimated that Bernanke will have to introduce QE3 to save US economy, but with the stimulus effects of QE1 and QE2, markets expected limited impacts on commodities markets from QE3. With large sell-off coming out, copper prices will be rapidly on a falling track. Moreover, crude oil prices have been falling in five consecutive weeks, down totally 20% from recent declines, which is negative for base metal prices. In domestic markets, the yield for one-year central bank bills issued surged unexpectedly on August 16th, while the government resumed issue of three-year central bank bills after suspending issue for three weeks, both actions highlighting the government's commitment to tighten. Coupled with weak domestic stock markets, copper prices will continue to fall this week.