SMM Daily Review - 2011/10/10 Base Metals Market

SHANGHAI, Oct. 11 (SMM) --

Copper

LME copper prices rallied after initially falling during China’s National Day holiday period, with prices returning to USD 7,300/mt last Friday. SHFE 1112 copper contract prices, the most active one, opened RMB 1,560/mt higher at RMB 55,060/mt on Monday. After the opening, SHFE three-month copper contract climbed as high as RMB 55,740/mt after a severe struggle between long and short investors at near RMB 55,300/mt. However, LME copper prices later met resistance at high levels, and Chinese stock markets moved lower after a high open. Coupled with great selling pressures from domestic short investors, SHFE three-month copper contract prices fell back, sliding nearly RMB 1,000/mt before the midday and generally fluctuating around RMB 54,500/mt in the afternoon session. SHFE 1112 copper contract prices finally closed at RMB 54,480/mt, up RMB 980/mt, or a gain of 1.83%. Positions for SHFE 1112 copper contracts were up 10,614 lots, while trading volumes were significantly down 64,084 lots. In addition, positions for SHFE 1201 copper contracts were up 12,524 lots, but trading volumes were slightly down 3,318 lots. With severe struggle between long and short investors, SHFE copper prices would follow LME copper prices to look for support at the five-day moving average.       

In the spot market, copper offers were quoted between RMB 55,400-55,500/mt at discounts of negative RMB 50/mt and premiums of positive RMB 0/mt, since SHFE copper prices opened higher in the morning business and near-month copper contract prices were higher than forward-month copper contract prices. Given discounts for high-quality copper, speculators made purchases before the delivery date, which resulted in brisk transactions. As SHFE copper prices fell significantly, high-quality copper turned into premiums of positive RMB 50-100/mt, with price offers held firm at RMB 55,000/mt. Traded prices for standard-quality copper fell between RMB 54,800-54,950/mt, and RMB 54,900-55,000/mt for high-quality copper. After SHFE copper prices fell rapidly, it failed to attract speculators. Furthermore, since cargo-holders were reluctant to sell at the lows, market transactions became quiet. Downstream producers mostly took a wait-and-see stance on the first trading day after China’s National Day holiday. SHFE copper prices remained weak in the afternoon session, but with limited fluctuating room. Market consumption was still sluggish, and spot copper premiums failed to improve, with premiums for high-quality copper reported between positive RMB 30-80/mt. Market transactions were restricted at RMB 55,000/mt, and trading sentiment was low.        

SMM conducted a survey concerning copper price trends this week.

Based on the survey, about 26% market insiders are optimistic towards the outlook, believing LME copper prices will climb to near USD 7,500/mt and SHFE copper prices will challenge RMB 56,000/mt. The Bank of England announced during China’s National Day holiday period that it would introduce a new round of quantitative easing on October 10th, injecting 75 billion pound into the economy to improve financing environment among commercial banks. The Bank of England also announced to keep the benchmark interest rates at a historical low of 0.5%. Markets believe that the European Central Bank (ECB) and Federal Reserve (Fed) will also implement loose monetary policies to control Europe’s debt crisis and stabilize market confidence, which will worsen global inflation and help copper prices gain momentum. The US dollar index has experienced a down for five straight days after challenging a high of 80, which will support the low-end copper prices. Technically, LME copper prices already consolidated at USD 6,600/mt during China’s National Day holiday period, and stood above the 5-day moving average, gaining more support at the low-end. As Chinese investors take copper imports as a way of financing given China’s Central Government’s tightening monetary policies, low LME copper prices will attract Chinese buying activities. As of October 10th, LME copper inventories were down 8,175 mt compared with the week ending September 30th, and LME cancelled warrants were 54,825 mt as of October 7th, an increase of 23,900 mt compared with the week ending September 30th, and the highest since May 2009. Falling copper warehouses were mostly Asian, which will help rebuild market confidence about China copper demand and is positive for future copper prices. Crude oil prices returned USD 85 per barrel, while gold prices increased to USD 1,650 per ounce, which will help LME copper prices break the resistance at USD 7,500/mt. 

Approximately 22% insiders are pessimistic about copper prices this week. They believe LME copper prices will extend losses and move between USD 6,600-7,000/mt, while SHFE copper prices will test RMB 50,000/mt at the low-end. The European debt problems are deteriorating, and market sentiment was also low during China’s week-long holiday period. Economic growth in Europe and the US is slowing down, with manufacturing index hovering at a low level of the 2008 financial crisis, which will continue to depress investor confidence. Furthermore, the US Senate will vote this Thursday on a bill of RMB operation, and will force RMB to appreciate once passed, which will affect China’s imports and exports. Once China demand falls, market consumption will not improve in October. Markets expect China’s CPI data to be announced this Friday will remain high, and China’s Central Bank will continue its tightening monetary measures, which will dampen downstream producers’ buying interest. Imported copper cargo-holders in Chinese markets will be eager to move goods for cash generation before the delivery date, which will drag down spot copper premiums. In summary, copper prices will probably continue to decline.

The remaining 52% insiders are cautious towards copper price movements this week, with expectation LME copper prices will struggle at near USD 7,300/mt and SHFE copper prices will move between RMB 52,500 -55,000/mt. The Euro-zone governments constantly introduce measures to ease market sentiment, but investors can’t see any substantial improvements for European debt crisis, which will not likely turn better in the short term. The current weak economy in the US and discontent among the people force Obama administration to make a choice between financing policies and loose monetary measures, which will keep investors wary of conducting market operations. Investors generally sell at high prices and buy at the lows to reduce risks, so both increases and declines in copper prices will be limited.

Aluminum

The most active SHFE 1112 aluminum contract opened higher at RMB 16,600/mt on October 10th following LME copper’s gains in the holiday period. After hitting RMB 16,700/mt in the afternoon with position increases among both longs and shorts, the contract finally closed at RMB 16,675/mt, up RMB 115/mt or 0.69% from previous trading day. Positions of the contract decreased 1,740 lots to 98,980 lots. Transactions of the contract were less than 40,000 lots during the day as most investors stood on the sidelines following the holiday. Since aluminum consumption will stay weak due to frustrating macro economic environment, the most active SHFE aluminum contract is expected to test support at RMB 16,500/mt in the short term.

Traded prices of spot aluminum in Shanghai were between RMB 17,000-17,040/mt on October 10th, with premiums of RMB 80-130/mt over the SHFE current-month aluminum price. The SHFE current-month aluminum contract opened higher to test RMB 16,900/mt during the day. Spot prices, however, failed to follow the climb due to significant increase of goods arrivals following the National Day holiday as well as the approaching change in the current-month aluminum contract. Spot premiums over the current-month contract also dropped below RMB 100/mt as goods holders were actively lowering stocks. Downstream stock replenishment was only made as-needed due to the prevailing bearish sentiment, thereby dragging down mainstream traded prices to near RMB 17,000/mt. High-grade supplies in the market nevertheless remained scarce. Market transactions slightly increased from pre-holiday trading.

SHFE aluminum prices opened higher on Monday after China’s National Day holiday. Meanwhile, downstream buyers in south China were eager to purchase for replenishment on the first weekend after the holiday, leading to a slight increase of local spot prices. Mainstream transactions were done at RMB 17,050-17,090/mt, resulting in premiums of RMB 50/mt over Shanghai from discounts seen in the pre-holiday market. With stock replenishment in the weekend and low orders, buying interest turned down on Monday, leading to inactive trading sentiment.

A latest SMM shows 43% of market respondents are bearish towards this week’s aluminum prices. Their pessimism is due to not only expectations for global economic weakness to continue given little improvement but worsening of the euro zone debt crisis, but also lasting tight monetary policies in China during the country’s hard inflation fight which already led to liquidity shortage in medium-to-small enterprises and forced these enterprises to the brink of collapse. Further more, increased goods arrivals following the National Day holiday pushed spot aluminum stock above 300,000 metric tons again, and with the delivery date approaching, which will narrow spot premiums, most market players believe aluminum prices will drop this week.

36% of market respondents are neutral towards this week’s aluminum prices. With production cost near RMB 16,800/mt, or even higher near RMB 17,000/mt at some aluminum producers due to higher electricity prices, aluminum prices are not likely to drop further supported by cost and lower selling off pressure from value-keeping activities at present price levels.

The remaining 21% of market respondents are pessimistic towards this week’s aluminum prices. Their confidence comes from cost support, LME copper’s gains during the National Day holiday, a higher opening following the holiday and downstream stock building demand.

Lead

On Monday, SHFE lead prices opened lower at RMB 14,615/mt, and touched an intraday high RMB 14,895/mt, meeting resistance at the 10-day moving average. In the afternoon, SHFE lead prices moved steadily around RMB 14,750/mt, and finally closed at RMB 14,740/mt, down RMB 140/mt. Trading volumes decreased by 14 lots to 804 lots, while total positions increased by 16 lots to 2,500 lots.

In domestic spot markets, well-known brands such as Chihong Zn & Ge and Chengyuan were traded between RMB 14,770-14,800/mt, close to SHFE 1111 lead contract prices. Other brands such as Hanjiang were quoted around RMB 14,680/mt. Both traders and downstream buyers purchased actively before the holiday, keeping transactions brisk.

With regard to lead price trends this week, European debt crisis will be the focus of the market. 40% of market players believe lead prices should hold steady between RMB 14,400-14,600/mt. LME inventories have grown 9,000 mt, while canceled warrants decreased by 2,000/mt as of September 30, which will drag down LME lead prices.

40% of market players were still pessimistic. European debt crisis is extending from governments to the banking sectors, although investors’ confidence was braced after European Central Bank pledged to release liquidity, French and German leaders were still pessimistic as Fitch downgraded Italy’s and Spain’s sovereign ratings, and reiterated to maintain an negative outlook of Portugal’s credit rating. Meanwhile, Moody’s also included Belgium’s rating in the negative outlook list. In domestic spot markets, smelters were remaining in normal production during the National Day holiday, and supply will outstrip demand from downstream buyers and traders, which will drag down lead prices. In this context, lead prices are expected to fall to RMB 14,000/mt.

The remaining 20% are optimistic, believing the risk appetite will improve as German and French leaders reached an agreement to support European debt-ridden banks. Besides, spot premiums against LME three-month lead contract prices rose to USD 21/mt, up from USD 18/mt before the National Day holiday, a sign of strong demand for lead in some regions. In this context, declines in LME lead prices were limited. Moreover, as secondary lead prices are higher than #1 lead, enterprises which use secondary lead as raw materials shift to the cheaper #1 lead. As a result, lead prices should rise to RMB 15,000/mt.

Zinc

On Monday, SHFE three-month zinc contract prices opened at RMB 15,170/mt, touching RMB 15,365/mt after opening, but met resistance at the 10-day moving average. SHFE three-month zinc contract prices inched down in the morning session, and fell to the 5-day moving average at noon. In the afternoon, SHFE three-month zinc contract prices closed at RMB 15,110/mt, up RMB 40/mt. Trading volumes decreased by 111,000 lots to 293,746 lots, while total positions increased by 6,586 lots to 201,016 lots.

In domestic spot markets, traded prices of #0 zinc were around RMB 15,150/mt in the morning session, and around RMB 15,100/mt in the afternoon as SHFE zinc prices fell. #1 zinc was traded between RMB 15,050-15,100/mt. Transactions improved compared to before the holiday. But SMM understands that downstream buyers preferred to purchase modestly, with cautious sentiment prevailing in the market.

Due to ongoing European crisis and mixed US job data, LME zinc prices moved between USD 1,820-1,930/mt during China’s National Day holiday.

With regard to zinc price trends this week, 40% of market players believe SHFE three-month zinc contract prices should rise to RMB 16,000/mt level. The US dollar index will move between 78-79. In domestic spot markets, as spot prices are close to SHFE three-month zinc contract prices, and since downstream buyer will replenish stocks, spot prices should find support. SHFE three-month zinc contract prices should move between RMB 15,500-16,000/mt, while spot prices will be firm between RMB 15,500-16,000/mt.

40% market players believe zinc prices should experience narrow corrections. SHFE three-month zinc contract prices are expected to move between RMB 15,000-15,500/mt, and spot zinc prices will fluctuate between RMB 15,000-15,500/mt.

The remaining 20% think zinc prices will likely fall further this week, to RMB 15,000/mt level. Although spot demand is improving, smelters will aggressively produce in order to meet the production target, so supply surplus will not ease. Given tightening cash flow and positive economic situation, zinc prices will not stabilize despite higher spot prices. SHFE three-month zinc contract prices will likely fall to RMB 14,500-15,000/mt, with spot prices moving between RMB 14,550-15,050/mt.

Tin

The sentiment in Shanghai tin market was relatively cautious on October 10th, the first trading day following the National Day holiday. Market supplies were tight as most smelters were holding goods. Mainstream tin brands during the day were Yunxi, Xiangxi, Nanshan and Jinxing. Mainstream traded prices fell between RMB 184,000-185,500/mt. Small volumes of Yunxi branded tin traded at RMB 186,000/mt. Market transactions were moderate during the day supported by regular purchases from downstream enterprises. The wait-and-see sentiment nevertheless extended its impact on the market.

A latest SMM survey shows 60% of market respondents expect domestic tin prices to further climb this week, supported by a 13% surge in LME tin prices, tin supply worries following Indonesian export ban and remaining high prices of raw materials including tin ore.

25% of market respondents expect domestic tin prices to stay at present levels this week. Though LME tin prices are facing pressures from a continuously frustrating macro environment, domestic tin prices will find support from high raw material prices and relatively tight supply.

Remaining 15% of market respondents expect domestic tin prices to fall from previous highs given falling risks in LME tin prices, weak domestic demand and impact from imported tin.

Nickel

Last Friday, LME nickel market opened at USD 19,003/mt and closed at USD 19,150/mt, up USD 100/mt from a day earlier, with the highest price at USD 19,255/mt and the lowest price at USD 18,607/mt. On Monday, LME nickel prices fell to a low of USD 18,651/mt during the morning Asian trading hours but stabilized at USD 18,800/mt during the afternoon Asian trading hours. During the early European trading hours, LME nickel prices pared certain losses on weaker US dollar. LME nickel inventories were 93,366 mt, down 900 mt.

In the Shanghai nickel spot market, overall trading sentiment was sluggish as LME nickel prices did not present strong performance. Mainstream traded prices of nickel from Russia were in the RMB 139,800-140,000/mt range, and mainstream traded prices of nickel from Jinchuan Group were in the RMB 140,500-141,000/mt range. Spot nickel prices slipped along with LME nickel price decline, but any loss in spot nickel prices was limited. Since LME nickel price movement was disappointing during China’s National Day holiday, market sentiment was dampened to certain extent. Transactions of spot nickel were quiet on Monday, as market players made purchases cautiously. Deals were largely made among trades, with few downstream purchasers entering market. 

Based on result of an SMM survey of market sentiment, 55% market players believe that nickel prices will continue to slip this week, with support at USD 18,000/mt. If LME nickel prices fall below USD 18,000/mt, prices may fall further to USD 17,000/mt. Macroeconomic condition is still pessimistic, with European debt crisis still unsettled and the US economic outlook gloomy. Investors’ confidence has been eroding, and the US dollar stays at high level, weighing on base metal prices. The weak momentum, coupled with poor fundamentals, will add risks for LME nickel prices to fall further. 35% market players expect that LME nickel prices will be neutral in the coming week. Although macroeconomic condition did not improve substantially, tense sentiment has eased to certain extent. In this context, LME nickel prices are expected to stabilize and move neutrally. The remaining 10% market players hold that LME nickel prices will extent upward momentum, but growth in LME nickel prices will be limited. Generally speaking, overall market sentiment was still bearish. In addition, transactions in spot market are not brisk due to tight capital and weak confidence, which will cap growth in nickel prices.