SMM Daily Review - 2011/9/19 Base Metals Market

SHANGHAI, Sept. 20 (SMM) --
Copper:
As LME copper prices fell back on the previous trading day, SHFE 1112 copper contract prices, the most active one, opened down RMB 700/mt at RMB 64,850/mt on Monday. Since LME copper prices directly lowered to test USD 8,500/mt after sliding below USD 8,600/mt, SHFE three-month copper contract prices moved lower after a down open, and were pressured at the daily moving average, with an intraday high of only RMB 64,940/mt. A nearly 2% drop in the Shanghai Composite Index worsened already weak SHFE three-month copper contract prices, and coupled with the fact that LME copper prices lost USD 8,500/mt at the tail of trading, SHFE three-month copper contract prices suffered aggressive selling pressures and fell to a yearly low of RMB 63,310/mt. Finally, SHFE 1112 copper contract prices closed at RMB 63,370/mt, down RMB 2,180/mt or a loss of 3.33%. Positions for SHFE 1112 copper contracts were up 38,726 lots, and trading volumes were up 140,000 lots. With short investors’ selling pressures gathering and downside technical indicators, SHFE three-month copper contract prices were expected to move lower. 

In the spot market, SHFE copper prices fell by nearly 3%, and hedged copper came into the market again, with growing bearish sentiment overshadowing the market. In this context, cargo-holders were eager to move goods for cash generation, and copper supply increased. As a result, copper offers failed to hold premiums, falling from the initial premiums of positive RMB 0-50/mt to discounts of negative RMB 50/mt- premiums of positive RMB 20/mt in the afternoon session. Traded prices for standard-quality copper were between RMB 64,150-65,250/mt in the morning business, and RMB 64,200-64,350/mt for high-quality copper. Downstream producers chose to stay on the sidelines due to expectations of falling copper prices. Market surpluses remained, making weak transactions more pronounced. SHFE copper prices fell to a new yearly low in the afternoon session, and cargo-holders were still eager to move goods for cash generation, increasing copper supply. Copper offers remained weak, with the mainstream offers reported between discounts of negative RMB 50/mt and premiums of positive RMB 30/mt, while traded prices fell between RMB 64,000 -64,250/mt. Market transactions failed to improve, and traded prices would lose RMB 64,000/mt in the upcoming day.    

SMM conducted a survey concerning copper price trends this week.

Based on the survey, almost all insiders are pessimistic towards the outlook. About 76% insiders believe copper prices will keep falling, with low-end LME copper prices expected to touch between USD 8,000 -8,200/mt and SHFE copper prices estimated to test RMB 60,000/mt. Markets are now most concerned about the European debt crisis, since both Greek and Italian bonds will expire during September and are eagerly needed bailout packages. However, the already released relative measures may only ease the debt problems temporarily instead of resolving them fundamentally, and the debt issues in the Euro-zone area have the risk of spreading. The Domino effects of the Europe’s debt problems will severely affect global economy. Poor economic reports in the US are unlikely to improve recently, and both Obama’s jobs stimulus program and deficit reduction plan will not provide a substantial support for the US economic recovery in the short term. Concerns over slipping into a new round of financial crisis again increased investors’ risk aversion moods, which has helped gold prices rise by 4% to return above USD 1,800/oz. The US dollar index has strongly rebounded, with the index directly pointing towards 78 after standing above 77, which will significantly dampen copper prices. LME copper prices twice in 2011 fell to USD 8,450/mt and then rallied, but the rebounding momentum has been weakening and prices have been drifting lower, with low sentiment. In Chinese markets, the People's Bank of China (PBOC), China’s central bank, has stressed many times that price stabilization remains the top regulatory priority, so market tight cash flows will recently remain unchanged. In spot markets, imported copper comes into the markets, and finance-driven copper cargo-holders are eager to move goods to generate cash, which keep market surpluses more pronounced. In the demand side, downstream producers’ orders haven’t turned better, which will not support copper prices. Technically, both LME and SHFE copper prices have already  dropped in the range without any support of moving averages, and the shorts are dominating the markets completely. Hence, copper prices will see a new yearly low.  

The remaining 24% insiders believe LME copper prices will find support between USD 8,300-8,400/mt after absorbing negative news. Despite bearish macro-economic environment, markets hold hopes for the US Federal Reserve (Fed) meeting to be held on September 20th, with expectation that the Fed’s meeting will make remarks about loose monetary policies and statements about easing market confidence even if without mentioning substantial measures, which will help LME copper prices hold the low-end and earlier lows. Meanwhile, given tight credit policies, finance-driven importers will actively make purchases at low prices, which will support copper prices. In Chinese spot markets, some downstream producers will buy at the lows as China’s National Day holiday approaches, and their stockpiling plans will also help support copper prices. Therefore, copper prices will likely rally after falling down. 

Aluminum:
Most active SHFE 1111 aluminum contract gapped lower at RMB 17,100/mt today due to aggressive short selling, and climbed to an intraday high of RMB 17,290/mt during initial trading hours on profit taking by the shorts. After the longs were forced to exit due to worries towards a downgrade on Italy debt by the credit rating agency Moody’s, the contract lost previous firm support at RMB 17,200/mt, and continued its downward move to finally close at RMB 17,105/mt, down RMB 25/mt or 1.44%. Positions of the contract decreased 4,284 lots to 111,514 lots. Position transfer to SHFE 1112 the next most active contract also continued. As aluminum consumption failed to improve as expected, SHFE aluminum plunged with other base metals, among which copper and zinc created yearly record lows. Though the most active SHFE 1111 aluminum contract was far from the yearly low, contracts for delivery after November all dropped below the RMB 17,000/mt mark. SMM expects the bearish tone to continuously prevail, and support for the most active contract at RMB 17,000/mt will also be relatively weak in the short term.

Traded prices of spot aluminum in Shanghai were between RMB 17,510-17,550/mt on September 19th, with premiums of RMB 120-160/mt over SHFE current-month aluminum price. In the morning, due to remaining weak spot aluminum consumption in September and increasing capital pressure approaching the month end, goods holders actively moved their goods at premiums above RMB 100/mt, with only a few exited the market due to low inventories. Purchases in the market were rarely seen as downstream buyers were consuming inventories. Market transactions, therefore, were extremely limited. In the afternoon, due to extended loss in SHFE current-month aluminum contract, a few middlemen purchased in the spot market. However, as the dropping run continued, the wait-and-see attitude gained strength, and quotations from goods holders were rarely seen with only a few transactions being reported early in the afternoon.

SMM weekly average aluminum ingot price for the week from September 13th to 16th was RMB 17,726/mt, down RMB 68/mt or 0.38% from previous week.

A recent SMM survey shows 64% of market respondents are pessimistic towards aluminum price trend this week. Their reasons include, lasting tight monetary polices have already pushed medium-to-small sized enterprise to the brisk of collapse, and stagnating global economic recovery due to worsening European and US economies also pushed conventional peak consumption season back. Further more, though low spot aluminum inventories on reduced output which was caused by power restrictions forced the shorts to exit the market, the longs failed to gain strength given increasing capital pressure. Orders at aluminum producers did not improve much either due to disappointing terminal consumption, thereby engulfing aluminum consumption growth. Recent large scale short-selling has already dragged forward contracts for delivery after November to below the RMB 17,000/mt mark, and most active SHFE 1111 aluminum contract is also likely to drop below the level due to fragile support. With a new round of capital pressure mounting, aluminum price may extend the dropping move, if happened, to at least early October.

Remaining 36% of market respondents expect little change in this week's aluminum price. With high expectations for easing monetary polices from US Fed given poorly performed US economy, they believe the dropping trend will stop after Fed provides the easing policy support to help the longs gain strength. Meanwhile, remaining high spot premiums near RMB 150/mt after SHFE current-month aluminum contract changed also boosted goods holders’ confidence for the RMB 17,500/mt mark. With low selling interest at lower prices, aluminum price may even see a slight rebound.

Lead:
SHFE lead prices fell to RMB 16,000/mt after opening, and later slipped further below RMB 16,000/mt dragged down by falling stock markets, with prices mainly moving around RMB 15,950/mt. As long investors exited the market, SHFE lead prices plummeted again, with prices finally closing at RMB 15,900/mt, down RMB 425/mt or 2.6%. Trading volumes increased by 146/mt to 374 lots, while positions declined by 206 lots to 2,562 lots. SHFE lead market was extremely weak, and positions for SHFE 1111 lead contract only increased by 114 lots and SHFE 1110 lead contracts remained the most actively traded contracts, an indication of a lack of market confidence.

As SHFE lead prices slipped further after falling below RMB 16,000/mt, spot lead prices fell below RMB 16,000/mt in response. Quotations for domestic well-known branded lead like Chihong Zn & Ge, Yuguang, Nanfang and Chengyuan were between RMB 15,850-15,930/mt, with discounts of negative RMB 50-150/mt against SHFE 1110 lead contract prices. Smelters were reluctant to move goods with prices below RMB 16,000/mt, but hedged goods flowed into spot markets, and supply of well-known branded lead increased. No quotations for other brands were heard in the market. Trading sentiment was cautious in the morning when SHFE lead prices tumbled, and domestic spot lead prices dipped further to RMB 15,800/mt in the afternoon. Downstream consumers made purchases at lower prices, slightly improving trading sentiment. 

With regard to lead price trends this week, 33.3% market players believe lead prices should fall. The European debt crisis continues, and concerns over global economic recovery exacerbate, and the US dollar index fluctuates at high levels; more lead-acid battery producers in Shanghai and Jiangsu suspended production, causing lead demand to fall. In this context, domestic spot lead prices should fall to RMB 15,800/mt.

26.7% market players are optimistic, believing the US Fed policy meeting taking place this week will issue some easing monetary policies, which will boost base metal prices. Although demand fell due to domestic environmental protection inspections, smelters were holding goods at prices below RMB 16,000/mt, so lead prices should rally to the RMB 16,000/mt level.

The remaining 40% believe lead prices should move around RMB 15,900/mt. The US Fed policy meeting to be held this week may report some positive news, but QE3 will not likely be announced, with European debt crisis still the market focus. Although smelters are holding goods, goods supply available is not tight as some other traders are still selling goods, while demand from downstream enterprises weakens due to environmental protection inspections.

Zinc:
SHFE 1111 zinc contract prices opened slightly lower at RMB 16,700/mt on Monday, and later fell below the daily moving average, with prices firm between RMB 16,400-16,450/mt in the morning session given intense struggles between long and short investors. LME zinc prices fell again in the afternoon session, and coupled with short momentum, SHFE 1111 zinc contract prices fell further and finally closed at RMB 16,210/mt, down RMB 625/mt or 3.71%. Transactions were sluggish, and trading volumes remained low at 190,000 lots, while positions fell by 8,672 lots to 194,272 lots, with short momentum stronger. Positions for SHFE 1112 zinc contract increased significantly by 32,044 lots, to 167,616 lots, with short investors dominating positions.

In spot markets, as SHFE 1111 zinc contract prices tumbled after opening lower, spot zinc prices fell in response. Traded prices for #0 zinc were between RMB 16,350-16,370/mt, and prices even fell to RMB 16,320/mt in the midday, with discounts against SHFE 1111 zinc contract prices between negative RMB 70-80/mt. Traded prices for #1 zinc were between RMB 16,300-16,350/mt. Zinc prices plummeted, and downstream buying interest improved at lower prices, keeping trading sentiment brisk. As SHFE zinc prices fell further in the afternoon, spot discounts narrowed gradually to negative RMB 60/mt. Downstream consumers turned cautious, leading to sluggish trading sentiment.
 
European debt woes still weighed down markets. Although sources report that five major central banks will inject US dollar liquidity into European commercial banks, which briefly boosted zinc prices, market confidence was still depressed by a slowdown in global economy. In response, SHFE 1111 zinc contract prices plunged after opening slower on Monday.

With regard to zinc price trends this week, 20% market players believe zinc prices should rally to RMB 16,800-17,200/mt. Concerns over European debt crisis were absorbed Monday as zinc prices dipped. The market also absorbed concerns over slower US economic recovery and plan coping with European debt crisis. On the other hand, downstream buyers will build stocks ahead of the National Day holiday. Spot discounts narrowed as smelters were holding goods. In this context, SHFE 1111 zinc contract prices should rally to fluctuate between RMB 16,800-17,200/mt, with spot prices moving between RMB 16,500-16,900/mt.

20% market players believe zinc prices will experience corrections. SHFE three-month zinc contract prices should fluctuate between RMB 16,300-16,800/mt, while spot discounts will narrow further. Spot prices should remain between RMB 16,200-16,500/mt.

The remaining 60% market players think zinc prices will likely fall further as market confidence was depressed due to European debt crisis and since QE3 was not announced yet. Domestic inventories are above 500,000 mt, so prices will not rise despite smelters are holding goods. SHFE three-month zinc contract prices should fluctuate between RMB 16,000-16,300/mt, while spot prices should hold firm above RMB 16,000/mt level. 

Tin:
Spot tin price in Shanghai fell on Sept. 20th as the huge loss in LME tin price damped goods holder’s confidence to stick to existing prices. Jiangxi branded tin traded between RMB 191,000-191,500/mt. Yunheng branded tin traded at RMB 193,500/mt and Yunxi at RMB 195,000/mt. The continuously dropping price, however, did not help improve sparse transactions. As imported tin gradually extend its impact on domestic tin, spot tin price may lose support at RMB 190,000/mt in the future.

A recent SMM survey shows 90% of market respondents expect further loss in domestic tin price this week. Among this 90% of respondents, 60% expect the dropping move to stop at RMB 190,000/mt, as they believe relatively tight supply in the market will provide strong support at the level, which will offset pessimism over LME tin price due to investor worries towards European and US economies, limited stimulation expected from US Fed, weak domestic consumption as well as impact from imported tin. The other 40% are even more pessimistic and expect a drop to below the RMB 190,000/mt mark. Remaining 10% of market respondents expect domestic tin price to stagnate at existing level.

Nickel:
Last Friday, LME nickel prices opened at USD 21,750/mt and closed at USD 21,505/mt, down USD 310/mt from a day earlier, with the highest price at USD 22,000 mt and the lowest price at USD 21,495/mt. On Monday, market concern over global economy fueled risk aversion sentiment. The higher US dollar also dragged down base metal prices. In response, LME nickel prices fell to hit a low of USD 21,045/mt after opening at USD 21,600/mt during the Asian trading hours. LME nickel inventories were 98,082 mt, up 432 mt.  

In the Shanghai nickel spot market, Jinchuan Group cut ex-works nickel prices by RMB 3,000/mt to RMB 157,000/mt. Hit by LME nickel price decline and Jinchuan Group’s downward adjustment of ex-works nickel prices, Shanghai nickel spot prices fell. Mainstream traded prices of nickel from Russia were in the RMB 156,000-157,000/mt range, and mainstream traded prices of nickel from Jinchuan Group were in the RMB 157,800-158,000/mt range. Traded prices were relatively high in the morning trading hours, but transactions and prices both fell during the afternoon trading hours along with LME nickel price decline. Comparatively speaking, Jinchuan nickel prices were relatively firm than Russian nickel price.

Based on result of an SMM survey, 45% market players believe that nickel prices will be neutral. Although market sentiment was still haunted by macro uncertainties, panic sentiment has eased to great extent, leaving limited room for base metal prices to slip further. 40% market players expect that nickel prices will continue to fall. Market expectation over FOMC meeting result was not optimistic, and risk aversion sentiment may trigger further decline of base metal prices. Current LME nickel prices receive support at USD 21,000/mt. The remaining 15% market players believe that LME nickel prices are expected to rebound to USD 22,000/mt, as technical correction and announcement of FOMC meeting result will ease risk aversion sentiment, and LME nickel prices are expected to bottom out.