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SMM Daily Review - 2011/8/22 Base Metals Market
Aug 23,2011 10:27CST
price review forecast
SHFE 1111 copper contract prices opened slightly up RMB 150/mt at RMB 66,350/mt on Monday, SHFE 1111 aluminum contract opened higher at RMB 17,250/mt and closed at RMB 17,215/mt

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.       

Most active SHFE 1111 aluminum contract opened higher at RMB 17,250/mt and closed at RMB 17,215/mt, up RMB 45/mt or 0.26% on August 22nd. Total positions of the contract added 3,000 lots in the morning which pushed the contract to a highest intraday price of RMB 17,295/mt, but finally dropped 804 lots due to profit taking in the afternoon. Transactions during the day dropped by 50% and were mainly short swing speculation activities due to cautious market sentiment. SMM expects the contract to keep fluctuating near RMB 17,200/mt in the short term as a combined result of insufficient upward momentum and positive high premiums, while future trend is still hard to predict.

Spot aluminum in Shanghai was mainly traded at RMB 17,770-17,800/mt in the morning of August 22nd, with premiums of positive RMB 230-250/mt over SHFE current-month aluminum prices. Despite high selling interest among goods holders, only small volumes of transactions were reported in the morning due to low buying interest among both downstream and middlemen. Mainstream trading prices slightly moved down to RMB 17,750-17,770/mt in the afternoon following falling of SHFE aluminum prices caused by profit taking. Transactions were rare as downstream and middlemen took a wait-and-see attitude.

SMM weekly average aluminum ingot price during August 15th to August 19th was RMB 17,805/mt, down RMB 111/mt or 0.62% from previous week. Concerning aluminum price trend in the future, a recent SMM survey shows 75% of respondents in the aluminum market are neutral. They believe the downward pressure from sluggish global economy will be offset by positive fundamentals. 19% of respondents are optimistic, believing little chance exists for a plunge of aluminum prices in the short term and downstream consumption improvement will provide upward momentum. Remaining 6% of market players expect a drop of aluminum prices due to weak global economy, high inflation pressure, rate-hike rumors as well as tight capital supply at end of month.

A string of economic data triggered investor concerns over the outlook for global economic recovery last week, and lingering European debt crisis prompted speculative funds to flow into gold markets. As a result, gold futures prices set a new high last Friday, with prices closing at USD 1,852.2 per ounce, up USD 30.2 per ounce. Standard & Poor's lowered its forecast of US economic growth in the next three years to 1.7%, and the US dollar index weakened from 74 to 73.6 in response, helping LME zinc prices climb to USD 2,200/mt at the tail of trading, with prices finally closing at USD 2,196/mt, up USD 33/mt.

SHFE 1111 zinc contract prices climbed to break RMB 17,000/mt in the morning session on Monday, with prices mainly moving between RMB 17,000-17,100/mt. The Shanghai Composite Index fell back in the midday, and LME zinc prices dipped in response. As a result, SHFE 1111 zinc contract prices lost RMB 17,000/mt, and later plummeted due to strong short momentum, with prices finally closing at RMB 16,765/mt, down RMB 65/mt. Trading volumes fell by nearly 130,000 lots to 477,726 lots, while positions increased by 15,664 lots to 256,602 lots, with short momentum stronger.

In spot markets, as SHFE 1111 zinc contract prices fluctuated in the morning, traded prices for #0 zinc were between RMB 16,850-16,900/mt, with discounts of negative RMB 200/mt against SHFE 1111 zinc contract prices. Spot discounts narrowed gradually to negative RMB 180/mt following falling SHFE zinc prices in the midday, and cargo-holders mostly stood on the sidelines after zinc prices edged lower, while downstream buying interest was low as well. #1 zinc was traded between RMB 16,800-16,850/mt. As SHFE zinc prices fell continuously in the afternoon, cargo-holders even suspended operations, leaving trading sentiment more sluggish.
Both SHFE and spot zinc prices fluctuated at low levels last week. Following Goldman Sachs's downgrade, Standard & Poor's also lowered its outlook for US economic growth, with concerns over slower economic recovery still overshadowing the market. 

With regard to zinc price trends this week, 40% of market players believe that zinc prices should rise further to stand at the RMB 17,000/mt level, moving between RMB 17,000-17,600/mt. Previous negative news has been absorbed by the market, and recent poor economic data as well as slower economic growth will help trigger the implementation of QE3. In domestic spot markets, spot discounts against SHFE 1111 zinc contract prices have narrowed to negative RMB 200/mt, causing goods supply available in the market to fall, and which will support spot prices.

40% market players anticipate SHFE zinc prices should unlikely break through the RMB 17,000 level, moving between RMB 16,700-17,200/mt. They believe the expectation of QE3 policy announcement did not virtually ease market concerns, and transactions of SHFE zinc contracts should be low due to tight cash flow at the end of the month, so zinc prices will unlikely rise. In domestic spot markets, as goods supply available in the market is tight, and smelters are unwilling to move goods, spot prices should be firm. In this context, spot prices should fluctuate between RMB 16,600-17,000/mt.

The remaining 20% believe that zinc prices will likely fall further. Goldman Sachs, Morgan as well as Standard & Poor's all downgraded their forecasts of US economic growth, and concerns over the banking sector throughout the Euro zone also spread. Meanwhile, SHFE announced its approval of adding 70 kt zinc holding capacity to help provide capacity for arbitrage operation at extended discounts. As a result, zinc prices should fall further. SHFE 1111 zinc contract prices should move between RMB 16,300-16,800/mt, with spot prices firm between RMB 16,000-16,500/mt.

SHFE lead prices moved around the daily moving average after opening higher at RMB 16,680/mt in the morning session, but the falling stock markets in the afternoon session dragged down SHFE lead prices to RMB 16,600/mt. Later SHFE lead prices rallied to RMB 16,650/mt, but fell back again and finally closed at RMB 16,605/mt, up RMB 60/mt, with support found at the 5-day moving average. Short investors were more active than long ones, a signal of cautious market sentiment. Trading volumes were down 594 lots to 1,268 lots, and positions were down 92 lots to 4,206 lots on Monday.

SHFE lead prices were stable after opening up over RMB 100/mt, helping boost domestic spot lead prices. Spot discounts were negative RMB 380-450/mt against SHFE 1110 lead contract prices. Offers for well-known branded lead like Chihong Zn&Ge, Chengyuan and Nanfang were RMB 16,300/mt, but almost no deals were made at high prices, while offers for other brands like Hanjiang and Tianma were between RMB 16,180-16,200/mt. Lead prices climbed, but stock and other surrounding markets remained weak, and the wait-and-see sentiment was dominant, resulting in limited trading volumes. SHFE lead prices declined following stock markets, and prices for well-known branded lead like Chihong Zn&Ge, Chengyuan and Nanfang were down to RMB 16,250/mt, with discounts of negative RMB 400/mt against SHFE 1110 lead contract prices, but offers for other brands remained firm between RMB 16,180-16,200/mt, with trading sentiment remaining lackluster.  

With regard to lead price trends this week, 67% of market players believe lead prices should fluctuate around RMB 16,300/mt. LME lead prices struggled at the USD 2,300/mt level last Friday, finding support at USD 2,280/mt. The market will remain cautious as U.S. banks JP Morgan Chase and Citigroup have significantly lowered their forecasts of US economic growth, and due to concerns over global economic recovery on falling US stocks, weighing down LME lead prices. In domestic markets, SHFE 1110 lead contract prices stabilized at RMB 16,400/mt despite plunging LME lead prices last weekend. Spot prices also found support at the RMB 16,000/mt level, but with transactions lower at RMB 16,300/mt, which was also attributed to sufficient stocks at downstream buyers. Both the rising lead prices and weakening transactions will further drag down SHFE lead prices.

The remaining 33% were optimistic, believing LME lead prices will fluctuate to rise this week. Bernanke's statement this weekend will be a focus of markets, with the expectation QE3 policy announcement will boost market confidence, pushing up LME lead prices. Domestically, lead prices should remain low, while smelters will be mainly holding goods. Transactions of refined lead will improve based on rising SHFE lead prices, and spot lead prices should surge to RMB 16,500/mt.

Spot tin prices in Shanghai continued the dropping trend on August 22nd. Mainstreaming trading brands during the day were Yunxi, Yunheng and Jiangxi brands, with mainstream trading prices at RMB 192,800-195,000/mt. Small volumes of Yunxi branded tin was traded at RMB 196,000/mt and some Jiangxi brands contributed transactions at RMB 192,500/mt. While branded tin smelters had kept their quotes firm, other smelters from Jiangxi province etc. successively offered lower quotes which led to more lower-priced supplies. The wait-and-see sentiment was strong in the market due to weak downstream consumption and continuous falling prices.

A recent SMM survey shows 75% of respondents in the tin market expect continuous drop of tin prices this week, due to a lack of support from both LME prices and consumption which had already caused some smelters to offer goods at lower prices. Remaining 25% of respondents believe tin prices will stabilize this week as LME prices will not plunge in the short term and relatively tight supply will also provide support.

Last Friday, LME nickel for delivery in three months opened at USD 21,250/mt and closed at USD 21,210/mt, down by USD 144/mt from a day earlier, with the highest price at USD 21,589/mt and the lowest price at USD 21,118/mt. On Monday, boosted by weaker US dollar, LME nickel prices advanced all the way and hit a high USD 21,366/mt after opening at USD 21,200/mt during the morning trading hours , but fell to hit a low of USD 21050/mt during the afternoon trading hours. LME nickel prices were still weighed to move below 5-day moving average. LME nickel inventories were up by 120 mt to 103,212 mt.

Jinchuan Group cut ex-works nickel prices by RMB 3,000/mt to RMB 161,000/mt on Monday, dragging down spot prices.  Mainstream traded prices of nickel from Jinchuan Group were in the RMB 162,300-162,500/mt range, and mainstream traded prices of nickel from Russia were in the RMB 161,000-161,500/mt range. Traded prices were relatively firm in the morning trading hours, but fell along with fewer transactions due to LME nickel price decline in the afternoon trading hours. Overall trading sentiment was quiet on Monday. Narrow fluctuation of LME nickel prices fueled wait-and-see sentiment and dampened trading sentiment in the market.

Based on result of an SMM survey on market sentiment, 65% market players believe that LME nickel prices will remain fluctuation trend in the following week, with support at USD 21,200/mt and resistance at USD 22,000/mt. They are holding that although panic sentiment eased to certain extent, investors' concern over economic recovery outlook still haunts market. Growing risk aversion sentiment will continue to weigh base metal prices. 20% market players believe that LME nickel prices will fall below support level and will slip further to USD 20,800/mt. The remaining 15% market players believe that LME nickel prices will rebound to certain extent from technical support. In the Shanghai nickel spot market, prices continue to extend weak momentum, dampening market players' confidence. Spot nickel prices were not firm and traded prices were also mixed, but Jinchuan Group's ex-works prices at RMB 161,000/mt supported low-end spot nickel prices to certain extent.

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