SHANGHAI, Oct. 24 (SMM) -- SHANGHAI, Oct. 24 (SMM) -- Last week, the European debt crisis still major factor affecting base metal performance. In addition, the US latest economic report on October 19th stated dim outlook for US economic growth, further weighing on market sentiment. Furthermore, a slowing of China’s Q3 economic growth dampened investor expectations of future base metal demand. Moreover, uncertainties of Sunday’s EU summit made investors more cautiously. In this context, base metal prices, led by LME copper prices, slumped last Thursday. Last week, SMMI was down 3.74%, with SMMI. Zn down 4.93%, and SMMI. Cu and SMMI. Pb down 4.1%.
The Shanghai Composite Index slipped 4% and financial markets were described as in a panic. In response, SHFE copper prices fell from RMB 56,780/mt, and closed down by the daily loss-limit on Thursday. On Friday, SHFE copper prices opened at a new yearly low of RMB 50,760/mt, and added to the weekly loss of over 10%. Short investors increased selling pressure and significantly expanded new positions.
Negative news from the US and European markets will impact SHFE copper prices, with financial factors expected to dominate markets. Aggressive selling pressure from short investors will cause SHFE copper prices to fall below RMB 50,000/mt and look for support at RMB 48,000/mt or RMB 45,000/mt in the coming week.
In the spot market, as the SHFE/LME copper price ratio continued to fall and increase losses for copper importers, offers for imported copper remained firm and supported higher copper premiums. Cargo-holders of domestic copper took this opportunity to actively move goods in order to generate cash, but hedged copper came into the market, keeping market supply adequate. SHFE near-term copper contract prices were higher than SHFE forward-month copper contract prices, so speculators chose to buy spot copper and sell SHFE copper contracts based on pessimism towards future copper prices. Downstream producers with adequate downstream orders made purchases at low prices, while speculators were restricted by higher copper premiums, keeping overall market transactions lower than the previous week.
In the coming week, imported copper used for financing will come into the market. Due to the approach of the month’s end, capital pressures will force cargo-holders to move goods for cash generation, so imported copper supply will improve. Overall sufficient market supply will remain unchanged, which will restrict the extent that copper premiums can increase. If copper prices fall below RMB 50,000/mt and are attractive to downstream producers and speculators, low-end SHFE copper prices will find support.
Aluminum inventories monitored by SHFE surged by 40,000 mt following China’s National Day holiday due to the approaching delivery date and weak consumption, taking inventories which fell to a record low since February 2008 before the holiday to above 100,000 mt. SHFE three-month aluminum contract prices fell continuously for four consecutive days, following other base metals trends last week, after losing support from market fundamentals and with prices even falling below RMB 16,000/mt before stabilizing.
Sluggish consumption kept spot aluminum inventories high, and SMM aluminum prices plunged by over RMB 600/mt on two occasions, moving down from RMB 16,900/mt, with prices even falling to a new low of RMB 16,290/mt later in the week due to strong willingness by some cargo-holders to move goods to generate cash flow. Overall trading sentiment was modest given sufficient market supply.
SHFE 1201 aluminum contracts are expected to become the mostly actively traded contracts this week, with the contract prices expected to move between RMB 15,800-16,000/mt. In the spot aluminum market, a combination of adequate supply, weak consumption, and stronger willingness by some cargo-holders to move goods to generate cash flow will help drag down aluminum prices to around RMB 16,300/mt, with strong pressures expected at RMB 16,500/mt. Market transactions will remain sluggish.
Last week, prices in China’s domestic spot markets slid from RMB 15,000/mt, to RMB 14,100-14,180/mt on Thursday, and rallied to around RMB 14,350/mt on Friday, down an average of RMB 1,000 within the week. Smelters’ strong unwillingness to move goods helped support spot prices, with spot premiums over SHFE 1111 lead contract expanding to positive RMB 100-150/mt. Downstream buying interest was high at low prices.
If prices remain sluggish, domestic lead smelters will remain reluctant to move goods unless they experience tight cash flow pressures. Downstream producers will likely build stocks at lower prices in preparation for the upcoming winter peak demand period for lead-acid battery consumption, which will support spot prices. Spot premiums over SHFE three-month lead contract will expand to above RMB 200/mt, with transactions expected between RMB 13,800-14,500/mt.
In domestic spot markets, market supply was tight, with spot premiums between RMB 0-20/mt against SHFE three-month zinc contract prices. Premiums were as high as RMB 300-350/mt on Thursday as SHFE zinc prices plunged. Market supply increased after the delivery date, while brisk downstream buying at lower prices help keep transactions brisk. Last week, spot zinc were traded below RMB 15,000/mt, with downstream buying interest improving and allowing downstream buyers to aggressively replenish stocks, especially as spot prices fell to RMB 14,250/mt last Thursday. Since smelters had recently cut output, arrivals in the market of new goods were limited. Inventories in east China fell by 10,000 mt, to 418,400 mt. Inventories in south China were down by 6,000 mt to 132,000 mt, and inventories in north China fell by 1,000 mt, to 110,000 mt.
Domestic tin prices slipped further during the week from October 17th to 21st. Though the SMM tin price dropped nearly RMB 5,000/mt to RMB 178,000-182,500/mt, its losses was maintained near 2%, which was the least compared with other base metals.
With continuously slipping tin prices, the wait-and-see sentiment turned stronger among downstream enterprises, eroding support for the metal. However, the selling interest remained strong among most smelters, who are unwilling to sell large volumes of tin at such low prices. Downstream buyers only purchased on an as-needed basis and market transactions remained sparse.
Tin output dropped significantly due to capital pressure at SMEs and weaker consumption. The accelerated appreciation of RMB also added to pressures at export-oriented enterprises, which in turn led to a weaker tin demand.
Market tin supply remained tight, but only provided limited support for tin prices. At present there are still smelters holding goods. Secondary tin was not seen for months in the domestic market as secondary tin producers reduced their output due to high scrap tin prices.
In China’s spot nickel market, spot nickel prices were also on a downward track. LME nickel prices fluctuated narrowly around USD 19,000/mt, giving support to spot nickel prices at RMB 140,000/mt. However, when LME nickel prices began to fall due to growing panic sentiment, spot nickel prices fell sharply to between RMB 135,000-137,000/mt. Although Jinchuan Group’s ex-works nickel prices were firm at RMB 139,000/mt, actual spot nickel prices fell below this level due to weak demand. As of last Thursday, the average weekly price for SMM #1 refined nickel was RMB 138,700/mt, down RMB 1,830/mt from a week earlier.
Demand has been sluggish recently, with most deals made among traders. In addition, production at most private steel mills has been negatively affected by tight liquidity, also reducing demand for raw materials. Finally, due to environmental inspections and RMB appreciation, exports from the electroplating sector were relatively sluggish, also reducing demand for refined nickel. Cargo-holders were pessimistic towards the future market outlook given current global economic conditions and many believe nickel prices will fall further. In addition, near the end of the year, some market players believe tight liquidity may drag down prices further, which also added to market pessimism.