SMM Daily Review - 2011/8/29 Base Metals

SHANGHAI, Aug. 30 (SMM) –

Copper

As LME copper prices closed higher last Friday, SHFE 1111 copper contract prices, the most active one, opened up RMB 160/mt at RMB 67,350/mt on Monday. Due to a close on the LME copper market, SHFE three-month copper contract prices lacked guidance. There was news that China’s Central Bank planed to guarantee deposits in commercial banks into the deposit reserve range in a bid to control domestic inflation, so Chinese stock markets fluctuated after opening significantly lower. In response, SHFE three-month copper contract prices met resistance immediately after the opening, and fell to an intraday low of RMB 67,060/mt. However, as buying force increased near RMB 67,000/mt from shorts, SHFE three-month copper contract prices advance and broke the resistance at RMB 67,500/mt after the midday, reaching to a high RMB 67,630/mt. Finally, SHFE 1111 copper contract prices closed at RMB 67,610/mt, up RMB 420/mt, or a gain of 0.63%. Positions for SHFE 1111 copper contracts were down 66 lots, and trading volumes were down 69,874 lots. Given the close on the LME copper market, speculators kept cautious towards trading, and almost all short-term longs chose to close positions, as they would make further judgments after the LME copper market was open again.  

In spot market, SHFE copper prices moved higher after a low open, and without guidance from LME copper prices, positions were insufficient in futures markets, keeping spot markets cautious. Suppliers were active moving goods at the month’s end and forced to reduce premiums, which fell from premiums of positive RMB 0-80/mt in the morning business to discounts of negative RMB 20/mt-premiums of positive RMB 50/mt in the afternoon session. Trade prices for standard-quality copper were between RMB 67,320-67,450/mt in the morning business, and RMB 67,380-67,500/mt for high-quality copper. Imported standard-quality copper was already traded at slight discounts, and downstream producers made fewer purchases due to high SHFE copper prices, dampening market confidence about rebounds in future copper prices. SHFE copper prices continued to increase in the afternoon session, but copper supply reduced compared with the morning business. As a result, price offers from cargo-holders remained firm at premiums of positive RMB 0-50/mt, nearly flat with morning levels. Traded prices rose to RMB 67,400-67,550/mt, and trading sentiment was low.

SMM conducted a survey of industrial insiders concerning copper price trends this week.

About 27% of the surveyed insiders are optimistic towards copper prices this week, with LME copper prices expected at USD 9,250/mt and SHFE copper prices near RMB 70,000/mt. The US Federal Reserve (Fed) Chairman Ben Bernanke didn’t indicate QE3 last Friday, but from current US economic data, the Fed will choose the introduction of QE3 to stimulate the US economy, and the US dollar index will be on a downside track in the mid and long term, which will give copper prices a boost. From copper-demand side, labor disputes frequently occurred at Chilean and Indonesian mines, causing tight copper supply in the short term, which will support copper prices. Technically, both LME and SHFE copper prices have moved above the 20-day moving average, and coupled with upward technical indicators, copper prices will continue the rising momentum. 

The remaining 73% insiders in the survey believed LME copper prices will continue to move between USD 8,800-9,000/mt, and that SHFE copper prices will fluctuate in the RMB 66,000-67,500/mt band. There were signs speculative funds were flowing into the market temporarily before the central bank’s symposium, but after the failed indication of QE3 last Friday, market attentions have shifted to impacts from European debt problems. In this context, the longs will lose momentum. The uneven US economic results will give a limited boost to market confidence, and the Dow Jones will not likely rise, which will depress the buying interest to some extent and restrict the upward room for copper prices. Gold prices have met sell-off pressures after setting several new record highs, which will not serve as a strong leading force for base metal price trends. In domestic markets, both traders and downstream producers are facing tight cash flows due to the approach of the month’s end, keeping downstream consumption weak. Besides, imported copper quoted earlier at low prices will gradually arrive in copper inventories, which will hurt domestic copper markets and spot copper supply will be very sufficient. As cargo-holders are eager to move goods for cash generation due to tight cash flows, spot copper premiums will be dragged down. Some offers of imported copper Monday were reported at discounts levels, and if SHFE copper prices rebound, spot copper discounts will expand this week, so spot markets will not provide a support for copper prices. Furthermore, no price gap in futures copper markets made hedge trading impossible, reducing speculative activities. Ample supply, restricted demand, cash flow pressures and cautious speculations will all lead copper prices to fluctuate.   

Aluminum

After opening higher at RMB 17,380/mt, most active SHFE 1111 aluminum contract outperformed surrounding base metals contracts and hit an intraday high of RMB 17,395/mt on August 29th. However, due to market concerns towards liquidity pressure caused by sayings of a spread of base of reserve to include margin deposits, the contract quickly erased earlier gains to narrowly struggle at RMB 17,365/mt. Finally closed price was RMB 17370/mt, slightly up by RMB 5/mt or 0.03% from previous trading day. Positions of the contract fell by 2,080 lots due to profit-taking at the tail of trading. Transactions turned quiet during the day with only more than 20,000 lots reported with closed LME and strong resistance at RMB 17,400/mt given capital tightening expectations. SMM expects most active SHFE aluminum contract to stagnate at the 60-day moving average in the short term while gathering upward momentum.

Morning trading prices of spot aluminum in Shanghai were between RMB 17,760-17,790/mt, with premiums of positive RMB 140-170/mt over SHFE current-month aluminum prices. Spot aluminum prices fell as a result of drastic fluctuation in SHFE aluminum prices. Goods holders also actively lowered their quotes given weak consumption at the month’s end, with spot quotes in Wuxi falling the most to near RMB 17,700/mt. Market transactions were sparse. Spot quotes in the afternoon were between RMB 17,750-17,780/mt, with purchases rarely reported and only a few transactions seen near RMB 17,750/mt.

SMM aluminum ingot weekly average price during Aug. 22nd to Aug. 26th was RMB 17,788/mt, slightly down by RMB 17/mt or 0.1% from previous week.

A recent SMM survey shows 67% of market respondents are neutral towards aluminum prices during this week. Though upward momentum of aluminum prices is limited by weak macro economic outlook, seasonal low-demand as well as tight capital supply at month’s end, strong support can still be found from low inventories, power restrictions in summer and increased demand from China’s affordable housing project.

25% of market respondents are pessimistic towards aluminum prices during this week. Their view is based on continued cautious market sentiment due to US Fed’s delay of QE3 selection until September, remaining tight monetary policies during second half of 2011 as indicated by market rumors China’s central bank will include margin deposits into base of reserve, which will freeze another RMB 900 billion, higher selling interest among goods holders due to capital pressure during month’s end and increasing spot aluminum inventories.

Remaining 8% of respondents are optimistic towards aluminum prices during this week, as they believe a stop of falling at RMB 17,700/mt, limited supply and positive consumption expectations in September will boost goods holder confidence to struggle at RMB 17,800/mt.

Lead

Boosted by soaring LME lead prices last Friday, SHFE lead prices opened slightly higher at RMB 16,895/mt on Monday, but later fell back due to a lack of upward momentum. SHFE lead prices mainly fluctuated between RMB 16,830-16,870/mt on Monday, and finally closed at RMB 16,860/mt. Trading volumes fell by 12 lots to 638 lots, while positions increased by 28 lots to 4,160 lots. Although LME lead prices made strong gains last Friday, long investors on the SHFE market remained cautious.

As SHFE lead prices fell back after opening higher, traded prices for domestic well-known branded lead like Chihong Zn&Ge and Nanfang were mainly between RMB 16,380-16,400/mt, with discounts of negative RMB 450-480/mt against SHFE 1110 lead contract prices, while offers for other brands like Hanjiang were RMB 16,300/mt. Downstream buying interest remained low, keeping trading sentiment quiet. Spot lead prices were little changed in the afternoon, and market sentiment remained sluggish as well.

With regard to lead price trends this week, market sentiment improved. 66.7% of market players are optimistic. The Federal Reserve Chairman Bernanke did not announce QE3 last Friday, but he hinted the Fed will make relative stimulus policies at its September meeting. Although LME lead inventories jumped by 3,200 mt last Friday, a discount for cash over LME three-month lead prices changed from negative USD 6/mt to positive USD 3/mt, a signal of improving demand. LME lead prices surged to USD 2,400/mt last Friday, and SMM predicts LME lead prices will rebound, but with increases moderate. Domestic refined lead consumption improved gradually, and some downstream processors built inventories when lead prices were around RMB 16,300/mt. SHFE lead inventories fell again by 8,000 mt last week. SMM predicts domestic lead prices will stand above RMB 16,500/mt this week.

The remaining 33.3% market players believe zinc prices will move around RMB 16,300/mt. US GDP for the second quarter was up 1%, lower than forecasts, representing a weakening economy. China’s central bank ordered commercial banks to increase their reserves on September 5th, which will put intensive capital pressure on enterprises. Although smelters will increase goods supply to generate cash despite an optimistic outlook, downstream buyers will be cautious as they have built stocks previously. In general, SMM predicts SHFE lead prices will fluctuate in a narrow band.

Zinc

Positively affected by LME zinc prices last Friday, SHFE 1111 zinc contract prices opened slightly higher at RMB 17,100/mt on Monday. The LME market was closed on Monday, and SHFE zinc prices fluctuated weakly following the Shanghai Composite Index trend. SHFE 1111 zinc contract prices lacked upward momentum after opening higher, and fell slightly to around RMB 17,000/mt, with prices mainly moving between RMB 17,000-17,150/mt. Finally, SHFE 1111 zinc contract prices closed at RMB 17,125/mt, up RMB 75/mt. Overall trading sentiment was sluggish, with trading volumes falling by over 100,000 lots to 310,960 lots, while positions increased slightly by 21,10 lots to 282,704 lots.

In spot markets, as SHFE 1111 zinc contract prices fell to around RMB 17,000/mt after opening slightly higher, #0 zinc was traded near RMB 16,900/mt, with discounts of negative RMB 80-100/mt against SHFE 1110 zinc contract prices. #1 zinc was traded at RMB 16,850/mt. Cargo-holders moved goods aggressively, but buying interest was low given tightening cash flows at month’s end, keeping overall trading sentiment muted. Similarly, some smelters became more willing to move goods due to tight cash flows, but they only supplied goods to north China, with quotations high, so transactions were limited as well. 

The Federal Reserve Chairman Bernanke did not announce the QE3 last Friday, but the market is still expecting possibilities of QE3 implementation. China’s central bank ordered commercial banks to include their margin deposits in required reserves to mop up excessive liquidity.

With regard to zinc price trends this week, 80% market players believe that SHFE three-month zinc contract prices will find support at RMB 17,000/mt level, moving between RMB 17,000-17,500/mt. The Fed Chairman Bernanke did not announce any quantitative easing policies but said the Fed’s September meeting will be extended to two days, rather just one day previously set, so as to make other stimulus plans, triggering market optimism. As spot inventories are being consumed and smelters have been holding goods, goods supply available is tight, causing spot discounts to narrow to a low band. A large volume of warrants were released to add to spot goods supply, so zinc prices should edge up as cargo holders are holding prices firm.

The remaining 20% believe that SHFE three-month zinc contract prices will continue struggling at RMB 17,000/mt level. Any possibility of QE3 announcement will influence the market temporarily. China’s central bank order to enlarge requirement reserves will drain cash flows from the market. Downstream buying interest is low as zinc prices are close to their costs, while some smelters are moving goods modestly in the face of capital pressure. Transactions will unlikely improve notably this week, with SHFE three-month zinc contract prices moving between RMB 16,800-17,200/mt, and spot zinc prices struggling around RMB 17,000/mt.

Tin

With higher closing LME tin prices on August 26th and relatively tight supply, domestic spot tin prices closed higher on August 29th, with mainstream Yunxi, Nanshan and Kaiyuan etc. branded tin mainly trading at RMB 194,500-195,500/mt. Overall market transactions were slightly sluggish as downstream buyers purchased at lower prices on August 26th.

A recent SMM survey shows 40% of market respondents expect tin prices to maintain stable this week, since market confidence from rebounding LME tin prices will be offset by weak consumption and impact of imported tin. 35% of respondents expect a downward trend for tin prices as inflow of imported tin will further weaken consumption of domestic tin, thus pressing down domestic tin prices. Remaining 25% of market players are optimistic towards domestic tin prices as a result of higher market confidence backed by rebounding LME tin prices and relatively tight supply.

Nickel

Last Friday, LME nickel prices opened at USD 21,169/mt and closed at USD 21,700/mt, up by USD 680/mt from a day earlier, with the highest price at USD 21,700/mt, and the lowest price at USD 20,900/mt. On Monday, LME market was closed. 

In the Shanghai nickel spot market, Jinchuan Group raised ex-works nickel price by RMB 3,000/mt to RMB 161,000/mt along with last Friday’s LME nickel price hike. Boosted by Jinchuan Group’s price hike, traders’ confidence gradually resumed. Transactions of Russian nickel were better than Jinchuan nickel. Mainstream traded prices of nickel from Russia were in the RMB 161,000-161,500/mt range, and mainstream traded prices of nickel from Jinchuan Group were in the RMB 162,000-162,300/mt range, with few deals made at RMB 162,500/mt.

With regard to market sentiment, 50% market players believe that nickel prices will rally this week, holding that Ben Bernnake’s remarket has failed to trigger broad rally in base metal market, suggesting that market sentiment has stabilized to certain extent. In this context, LME nickel price will fluctuate higher this week. 30% market players expect that nickel prices will largely remain stable this week. As macro economic environment has not stabilized yet, LME nickel prices will continue to fluctuate. The remaining 20% market players believe that LME nickel prices may fall to certain extent this week. The soft domestic demand, coupled with weak momentum of LME nickel prices will drag down domestic nickel prices to certain extent.