SHANGHAI, Sept. 5 (SMM) -- The China Federation of Logistics & Purchasing (CFLP) announced on September 1st that the manufacturing PMI for August was 50.9, up from July’s 50.7, and is a sign that China’s manufacturing activity recovered slightly during August. However, new export orders fell significantly, higher raw material cost signals sluggish overseas demand, and domestic inflation is severe. Premier Wen Jiabao said curbing inflation remains current top priority. Later, China’s central bank took an alternative tightening monetary policy, and announced that reserve requirements will now cover margin deposits, which may drain a total of RMB 900-950 billion from the banking system over the next six months, equivalent to 100-150 basis points increase in the reserve requirement ratio, triggering investor concerns over economic recovery. Last week, global speculative funds still focused on whether the US Federal Reserve will launch the third round of quantitative easing (QE3) at the meeting on September 20th, and US dollar index strengthened. Mixed economic news limited rallied in base metals prices. Last week, SMMI rebounded by 0.99%, with SMMI.Ni and SMMI.Cu leading gains, up 2.55% and 1.3%, respectively. Aluminum prices were unchanged last week.
SHFE copper prices rebounded last week, but the gains were less than LME copper. Without guidance from LME copper prices, SHFE copper prices on Monday moved higher due to strong buying by longs at a low RMB 67,000/mt. SHFE copper prices opened higher over the past several days, rising from RMB 66,000-67,000/mt in the previous week, to between RMB 67,000 and 68,500/mt, a gain of 1.11% for the week. However, profit-taking by longs, as well as significant declines in positions and weak Chinese stock markets, all limited the upward momentum of SHFE copper prices, which began to feel more resistance at the 60-day moving average.
In the coming week, SHFE copper prices will follow LME copper prices. China will announce August CPI data, with markets mixed as to whether or not the data will show a turning point and China’s Central Bank will be forced to implement more severe monetary policies to control inflation. If August CPI data is positive, expectations of interest rate increases will weaken and SHFE copper prices will move toward RMB 69,000/mt.
Last week, copper supply was up and the proportion of imported copper of total supply was also higher. Cargo holders were active moving goods to generate cash due to heavy cash flow pressures at the month’s end, causing offers to turn from premiums into discounts of around negative RMB 200/mt. Downstream producers made limited purchases due to cash flows problems and weak orders, but some downstream producers with strong finances and who were optimistic toward future prices took the opportunity to enter markets to purchase raw materials. Market oversupply conditions persisted over the past week.
In spot markets, supply of imported copper will continue to increase in the following week, but will depress domestic copper prices. Since cash flow pressures will not likely improve in the short term, cargo-holders will be eager to move goods to generate cash, which will help expand spot copper discounts. However, optimism toward future prices will limit expansion of discounts. In addition, the price gap between scrap and refined copper is small, prompting some scrap copper consumers to turn to refined copper markets. Demand will begin to grow at the end of the low-demand period in September, which will also help support copper prices.
SHFE 1111 aluminum contract prices rose near the 5-day moving average last week, with low-end prices testing RMB 17,450/mt. Daily trading volumes were below 40,000 lots due to tight cash flows at month’s end, while intraday short-term speculative transactions caused positions to fall steadily. Power supply shortages became severe in south China, and spot aluminum inventories grew slowly, with positive market fundamentals helping support SHFE aluminum prices to resist declines. However, tightening cash flows at month’s end depressed buying interest, and high inflation in China resulted in sluggish domestic stock markets, both dampening upward momentum in SHFE aluminum prices. In general, SHFE aluminum prices fluctuated in a narrow band recently amid struggles between long and short momentum.
Month-end settlements tightened bank credit last week, which, when combined with China’s central bank’s widening of the reserve requirement, underscored that the liquidity crunch is unlikely to let up in 2H. This further damped already seasonally weak spot aluminum consumption. Spot premiums over SHFE current-month aluminum prices plunged from RMB 170/mt to near RMB 50/mt. Earlier during the week, cargo-holders actively lowered quotations in hopes of liquidating to cash, but failed to stoke buyer interest. Mainstream trading prices stayed below RMB 17,800/mt. Entering September, declining financing pressures, combined with optimism towards future aluminum price trends, will lead to lower interest for selling at lower prices among goods holders. Although there was no noticeable uptick in consumption, mainstream spot quotes were again headed north of RMB 17,800/mt despite limited transaction volume in the market.
Despite rising LME lead prices, SHFE lead prices moved higher only modestly. The People’s Bank of China announced it would extend reserve requirements to include margin deposits effective September 5th, which will absorb liquidity and curb commercial bank lending. In response, SHFE lead prices failed to break through RMB 17,000/mt, and later moved lower to between RMB 16,750-17,000/mt. In the coming week, SHFE lead prices should move between RMB 16,700-17,200/mt due to concerns over cash liquidity in the future.
In domestic spot market, prices rose slowly from RMB 16,300-16,400/mt, to RMB 16,400-16,500/mt. Spot discounts over SHFE 1110 lead contract were between negative RMB 450-500/mt. Both traders and downstream producers were cautious due to cash flow pressures at the month’s end. In the coming week, spot transactions will be made between RMB 16,300-16,700/mt, with spot discounts over SHFE 1110 lead contract between negative RMB 450-500/mt.
Last week, the US Federal Reserve Chairman, Ben Bernanke, did not announce QE3, but instead related the Fed’s September meeting would be extended to two days in order to develop additional economic stimulus plans, including the possibility of QE3. China’s Central Bank required commercial banks to include margin deposits in required reserves in order to absorb excessive liquidity. China’s PMI for August was 50.9, while LME zinc prices move higher and consolidated above the USD 2,200/mt level, but failed to break through USD 2,300/mt.
SHFE three-month zinc contract prices fluctuated between RMB 17,200-17,400/mt, with discounts expanding to negative RMB 260/mt, up from negative RMB 120/mt early in the week, but with transactions still quiet. Spot zinc prices stood at RMB 17,000/mt, causing some smelters to sell modest amounts of goods.
Last week, spot inventories were down by only 1,000 mt, falling to 573.4 kt. Inventories in east China remained unchanged at 431.4 kt and due largely to quiet market transactions. Inventories in south China also remained unchanged at 136 kt. Inventories in north China were down by 1,000 mt, to 6 kt, and due in large part to Chifeng Hongye’s 10-day maintenance cycle, which in effect suspended goods supply to north China.
Supported by rising LME tin prices, the SMM average tin price gained RMB 2,100/mt from a week earlier to RMB 196,350/mt as of September 2nd Friday. LME tin prices broke through the USD 24,000/mt mark during the first two days and closed at USD 24,255/mt on August 31st Wednesday. Though performance of the metal was relatively weaker compared with surrounding LME metals, it still boosted domestic goods holder confidence to keep their quotes firm.
Tin smelters reduced supplies due to high raw material prices, thereby leading to fewer lower-priced goods in the market and lifting up lower end of tin prices. Higher-end price of domestic tin reported limited gains, however, as transactions near RMB 197,000/mt were rarely reached.
Market transactions during the first three days were slightly sluggish, and turned active on Thursday when downstream purchases increased due to continuously rising spot prices, but turned sluggish again on Friday with falling LME tin prices. As no increase for demand or transactions was seen entering September, the conventional peak season is expected to come later than previous years.
Boosted by the rally in LME nickel prices, Shanghai spot nickel prices bottomed out and began to rebound last week. Jinchuan Group raised ex-works nickel prices twice by a total of USD 5,000/mt, to RMB 163,000/mt, sending spot nickel prices higher, with mainstream prices advancing to the RMB 164,000-165,000/mt range. The average weekly price of SMM #1 nickel was RMB 162,060/mt, up RMB 1,510/mt from a week earlier.
A relatively strong performance by LME nickel boosted trading sentiment in spot markets but trader unwillingness to sell goods increased due to optimism as LME nickel prices continued to advance in afternoon trading hours, leaving trading volumes low. Cargo-holders, however, cautiously stockpiled goods since debt issues in the US and EU still haunted markets, and increased supply when prices slipped. The price spread between refined nickel and NPI narrowed further with the recent decline in refined nickel prices and made refined nickel more preferential to consumers. In this context, steel mills increased purchases of refined nickel and helped keep nickel prices firm.