SMM Weekly Review and Forecast (Sept. 26-30)

SHANGHAI, Sept. 26 (SMM) –Last week, Standard & Poor's (S&P) downgraded the credit ratings of Italy and seven European banks, and the International Monetary Fund (IMF) cut its forecasts for global growth for 2011 and 2012. US President Obama's job-creation plan has not yet produced any results, while the US Federal Reserve (Fed) announced it would leave interest rates unchanged and postpone any QE3 policy. The Fed also announced to buy USD 400 billion long-term bond Treasuries and sell the same amount of short-term bonds in order to cut yields on long-term government bonds. PMI data from China, France, and Germany was weak, increasing the risk of a global double-dip recession. In response, the Euro fell significantly, while the US dollar index jumped to a high of 78.8 for a risk hedge. As a result, commodity markets tumbled. SMMI fell 9.68%, with SMMI.Ni and SMMI.Cu leading the declines, down 13% and 11.86%, respectively. SMMI.Al dropped by 3.37%，while SMMI.Sn lost 4.13%. Copper, aluminum and zinc prices in the upcoming week are expected to fall further after all slid by their daily limit last Friday    

Copper
Last week, SHFE copper prices also fell sharply from RMB 65,000/mt and hitting the daily trading loss limit on Friday. SHFE 1112 copper contract prices fell to a low of RMB 56,940/mt, with losses for the week reaching 15%. As of Friday afternoon, positions for all SHFE copper contracts increased by 18,958 lots and trading volumes were up by more than 1.8 million lots. Long investors closed positions of more than 20,000 lots on Friday due to bearish sentiment, with risks of another recession overshadowing financial markets. 

SHFE copper prices next week will remain soft given weak domestic stock markets and tight cash flows at producers at the month's end.

In spot markets, as copper prices slumped, hedge traders were reporting profit-taking activity, while long investors chose to close positions. Copper importers were active moving goods to earn profits at current prices. Market supply was sufficient, so copper premiums failed to maintain high. Fewer downstream producers entered the market after copper prices fell, while traders were also cautious, preferring to wait until a stable price trend was visible.

In the upcoming week, downstream producers will prefer to stand on the sidelines due to tight cash flows.

Aluminum
SHFE 1112 aluminum contracts became the most actively traded contracts on Thursday and stood at RMB 17,000/mt early last week. Prices later fell below this mark due to growing investor pessimism, with trading volumes increasing but prices falling as low as RMB 16,380/mt. SMM spot aluminum prices struggled at RMB 17,500/mt, but slower declines in SHFE aluminum prices caused cargo-holders to hold goods, although lower-priced goods were still available in the market given tightening cash flows at month's end. Spot aluminum prices fell sharply, but were still firm above RMB 17,000/mt after SHFE aluminum prices tumbled on Friday. Downstream processors made limited purchases for stock building, but trading sentiment was still sluggish due to tight cash flows and market pessimism.  

SMM predicts SHFE 1112 aluminum contract prices will move below RMB 17,000/mt in the coming week, with prices expected to find support at RMB 16,000/mt. SMM aluminum prices will struggle around RMB 17,000/mt and downstream buying interest will be very low given growing cash flow pressures at month's end and due to limited purchases ahead of China's National Day holiday. Overall trading sentiment will remain sluggish. 

Zinc
In domestic spot markets, spot prices were firm as smelters were holding goods due to lower zinc prices, but with goods supply available mainly from arbitragers. Spot discounts against SHFE 1111 zinc contract prices narrowed to RMB 0/mt, from negative RMB 80/mt, and with spot prices struggling at RMB 16,000/mt. Downstream buyers were active purchasing ahead of China's National Day holiday but were limited by tight cash flows at the end of the month. Zinc prices plunged on Friday and spot prices fluctuated, turning the market cautious.

Last week, spot prices plunged, resulting in aggressive purchasing by downstream buyers and causing domestic inventories to fall. Inventories in south China fell 4,500 mt, to 128 kt, as output at smelters in Guangxi province were affected by power restrictions, and since downstream buyers increased purchases at lower prices. Inventories in north China grew 2,000 mt, to 9 kt.

Lead
SHFE 1111 lead contract became the most actively-traded contract last week. After falling below RMB 16,000/mt on Monday, SHFE 1111 lead contract prices closed higher over the next two days, but remained weak, and on Thursday briefly set a new low of RMB 15,020/mt since its launch. Both trading volumes and positions were limited. SHFE 1111 lead prices are expected to test RMB 14,000/mt in the coming week.
Domestic spot lead prices followed suit, falling from RMB 15,900/mt in earlier week to around RMB 15,350/mt at the week's end, and with spot discounts over SHFE 1111 lead contract between RMB 50-100/mt. Although domestic lead smelters were unwilling to move goods after prices fell below costs, market supply was still sufficient due to arbitrage trading. Downstream producers made some purchases in mid-week as prices showed signs of stabilizing, helping improve market trading sentiment. Recently, the market has been dominated by bearish and cautious trading sentiments, which will also weigh on spot prices. With cash flow pressures at the month's end, markets are not expecting any large-scale stock replenishment ahead of China's National Day holiday. In the coming week, domestic spot prices will likely fall below RMB 14,000/mt.

Tin
Due to continuously sliding LME tin price, weak domestic consumption and impact from imported tin, domestic tin price failed to end its downward run during the week from September 19th to 23rd. The falling run accelerated on Friday, September 23rd due to plunging LME tin price overnight, with domestic traded prices dropping to RMB 175,000-180,000/mt during the day. Despite falling prices, market transactions remained sluggish during the week on weak terminal consumption. Meanwhile, further plunges in LME tin price stoked some domestic buyers' interest for tin import. Therefore domestic tin import will continue, which will weigh on domestic tin sales as it meets producers' demand. Spot tin price therefore still has downward space.

Nickel
Domestic spot nickel prices fell sharply along with LME nickel price plunge last week. Jinchuan Group cut ex-work nickel prices twice by a total of RMB 7,000/mt, to RMB 153,000/mt. As of last Thursday, the average weekly price of SMM #1 nickel was RMB 154,000/mt, down 4,750 from a week earlier. Last Thursday's LME nickel price decline helped drag spot nickel prices down to last Friday's range of RMB 138,500-140,500/mt.

Since LME nickel prices were sluggish last week, transactions in spot nickel market were also sluggish. Before last Thursday, a lack of clear price trend for LME nickel price made most market players stay out of the market or make trades cautiously, but some traders took the opportunity to replenish stocks at low prices. Downstream consumption was still relatively quiet owing to the lack of expected pre-holiday stock replenishment.