SHANGHAI, Feb. 20 (SMM) -- The US dollar index strengthened to 80 given the delay in the second EU/IMF bailout for Greece and the downgrades of sovereign credit ratings and banking credit ratings in European countries, and domestic and international base metal prices fell significantly in response. SMMI was down by 2.19%, led by SMM.Ni which plummeted by 4.45%. SMMI.Pb and SMMI.Zn were down by 2.19% and 2.84%, respectively, while SMM.Cu slipped by 0.31%.
Following LME copper price movements, SHFE copper prices fell to RMB 58,780/mt, down from RMB 61,150/mt and as of Thursday, down 3.82% for the week. Positive statements from Chinese Premier Wen Jiabao and Central Bank Governor Zhou Xiaochuan helped Chinese domestic stock markets close with slight gains. SHFE copper prices showed resilience, allowing the SHFE/LME copper price ratio to improve slightly. Positions and trading volumes also increased while selling pressures grew, moving SHFE copper prices towards the 30-day moving average.
In spot markets last week, as the price gap between SHFE 1202 and 1203 copper contracts remained RMB 500/mt prior to the delivery date for SHFE 1202 contracts, spot copper was still commanding premiums, but later turned to discounts after the delivery date. Hedged copper came into the market as copper prices fell, significantly increasing copper supply. Downstream buying interest weakened after stocks were replenished earlier last week. Spot copper discounts rose continuously later the week despite limited market transactions.
LME prices may fall to USD 8,000/mt once losing USD 8,300/mt in the coming week, while SHFE copper prices will confirm support at RMB 59,000/mt.
SHFE 1205 aluminum contract prices also fell continuously from RMB 16,300/mt, to RMB 16,120/mt, but with prices temporarily finding support at the 60-day moving average. Pessimism dominated the market, and daily trading volumes were around 10,000 lots. Spot discounts narrowed to near zero ahead of the delivery date for SHFE current-month aluminum contracts, but later returned to RMB 100/mt once the delivery date passed. Cargo-holder attitudes toward selling goods were mixed, with high-quality aluminum ingot unavailable in the market, while supply of non-registered brands was considered sufficient. Downstream processors purchased on an as-needed basis and purchase interest from middlemen was also low, resulting in limited transaction volumes.
SMM predicts SHFE 1205 aluminum contract prices will fluctuate between RMB 16,000-16,200/mt. Downstream consumption is improving slowly, so any upward movement in spot aluminum prices will be limited and prices should move around RMB 15,900/mt. Spot discounts will remain stable at RMB 100/mt. Market supply will be sufficient, but trading activity will improve little.
Last week, SHFE 1204 lead became the most active traded contract, and SHFE lead prices continued falling to a low of RMB 15,530/mt, down from RMB 16,000/mt last week and a loss of 4%. This coming week, SHFE lead prices are expected to move between RMB 15,600-16,000/mt.
In China’s domestic spot markets, prices for branded lead was RMB 15,850-15,900/mt early last week, but fell to RMB 15,600/mt on Thursday due to slumping SHFE lead prices. Purchases from downstream buyers improved as enterprises gradually resumed and as lead prices moved lower. Given the sharp decline in lead prices and lower inventories following heavy sales the previous week, smelters were now cautiously selling goods. Recovering production at downstream enterprises should cause demand to improve. Smelters will become more willing to move goods as lead prices stabilize, so spot prices in the coming week should be between RMB 15,600-15,850/mt.
SHFE zinc prices fell continuously last week, while spot discounts were narrowing from RMB 350/mt the previous week, to the current RMB 150/mt. Demand for warrants and registered zinc brands was strong, while imported zinc prices were significantly lower than domestic prices. Spot prices fell to RMB 15,400-15,500/mt on Thursday as zinc prices continued to lose ground, causing downstream buying interest to improve and arbitrage opportunities for traders who bought spot zinc at lower prices.
Spot inventories fell slightly last week. Demand improved slowly as downstream enterprises returned to normal following the holiday. Inventories in East China fell by 3,000 mt to 456,400 mt, while inventories in South China grew 200 mt to 144,500 mt. However, since many zinc-related smelters in Guangxi province have suspended production, inventories in South China should continue to fall. Inventories in North China remained unchanged at 15,000 mt.
Following a slide to below RMB 180,000/mt in the previous week, spot tin prices dropped further to RMB 173,000-177,000/mt last week, with the SMMI.Sn index dropping 1.94% on a weekly basis. Trading was quite light in the week due to renewed uncertainties in the Greek debt crisis. Tin price was quite sensitive to development in the macroeconomic side as supply turned normal after smelters resumed production while downstream demand stays weak. Goods holders were open to deals but downstream businesses mostly were slowly consuming stocks built ahead of Chinese New Year with operating rates held low. Rare deals during the week fostered an insight among goods holders that traded volume will not improve even after tin prices drop.
Generally speaking, profit-taking may occur in the coming week following positive news from the euro zone, but LME nickel prices should continue to rise as well. However, since any positive impact from the euro zone has already been absorbed by markets and since prices are still meeting resistance, any increases in LME nickel prices will be limited. SMM expects LME nickel prices will test USD 22,450/mt if able to break through resistance at USD 22,000/mt, and will be supported at USD 21,100/mt and at the 10-day moving average.
In the Shanghai nickel spot market, a small number of traders already began to replenish stocks last week. Since LME nickel prices are expected to rise, the willingness by downstream enterprises to purchase raw materials will grow and boost transactions. Last week’s spot nickel prices were below LME nickel prices and the price spread between domestic and LME nickel prices expanded last week, but should narrow if downstream demand improves in the coming week. SMM expects spot nickel prices will continue to follow LME nickel price trends and will move between RMB 140,000-155,000/mt in the coming week.