SHANHGAI, Mar. 5 (SMM) -- The European Central Bank’s second round of three year long-term refinancing operation obtained EUR 529.5 in capital, exceeding market expectation and easing concern over credit crunch in the euro zone. In addition, the US initial jobless claim dropped to the lowest level since March 2008, injecting confidence in market. Moreover, China’s official PMI for February advanced to 51.0, an indication of expansion in manufacture sector. In response, base metal market rebounded. However, Bernanke’s statement made the US dollar rebound, erasing early gains of LME base metal prices. Last week, SMMI rebounded by 0.99%, with SMMI.Cu leading the increase by 1.52%, and only SMMI.Ni down 0.72%.
Markets expect liquidity to now improve following the cut in the bank Reserve Requirement Ratio (RRR) by China’s Central Bank, which boosted futures and stock markets and helped support SHFE copper above RMB 60,000/mt. Long and short investors, however, mainly conducted intraday operations, making price resistance more pronounced at RMB 61,000/mt but allowed SHFE copper prices to close up 1% for the week. SHFE copper prices still posted weaker gains than LME copper, so the SHFE/LME copper price ratio remained unfavorable.
In spot markets last week, hedged copper was locked as copper prices showed increasing resilience, while losses for copper importers expanded. Domestic copper smelters held goods due to growing discounts, causing supply to decline significantly and helping spot copper discounts fall. As markets turned more optimistic toward future copper prices, high-quality copper was extremely sought by traders, but downstream producers opted to stand on the sidelines at prices above RMB 60,000/mt. As a result, overall market activity was modest as month-end cash flow pressures dampened buying interest.
SMM expects in the coming week that LME and SHFE copper prices will challenge resistance levels of USD 8,700/mt and RMB 61,000/mt, respectively.
Although LME aluminum prices were high, SHFE three-month aluminum contract prices remained weak near RMB 16,250/mt, causing the SHFE/LME aluminum price ratio to fall below 7. Spot aluminum prices in Shanghai fluctuated last week between RMB 15,870-15,920/mt, up RMB 20/mt from the previous week, but actual consumption remained sluggish and only middlemen were actively purchasing. Strengthening domestic stock markets helped boost market sentiment, so some cargo-holders became less willing to sell at lower prices, helping limit supply and preventing spot aluminum prices from falling as SHFE aluminum prices fell. Spot discounts narrowed from RMB 150/mt, to RMB 100/mt, but overall trading activity was limited.
SMM predicts SHFE three-month aluminum contract prices will find support at RMB 16,200/mt, but weak consumption and strong short selling pressures will create strong resistance at RMB 16,300/mt. In spot markets, although consumption remains weak, spot discounts will narrow gradually to below RMB 100/mt as markets expect the Chinese economy to recover and as the delivery date nears. In this context, spot aluminum prices are expected to remain above RMB 15,900/mt, but will lack further upward momentum to push above RMB 15,950/mt.
Last week, SHFE lead prices followed LME lead movements and initially rose to RMB 16,400/mt, but then fell back to RMB 16,150/mt. SHFE lead prices should move between RMB 15,900-16,500/mt this coming week.
In China’s domestic spot markets, lead prices rose on Wednesday to RMB 16,050/mt, up from RMB 15,950/mt at the beginning of the week, and with discounts over the most active SHFE lead contract price expanding to RMB 200-300/mt. Selling interest among smelters improved early last week due to the rising lead prices but fell later as lead prices dropped below RMB 16,000/mt. In the coming week, selling interest of smelters will be lower as financial pressures ease and due to optimistic expectations of future lead price. On the other hand, downstream buyers are expected to purchase on an as-needed basis due to high prices, with spot prices expected at RMB 15,800-16,200/mt.
In domestic spot markets, spot prices resisted increases although SHFE zinc prices edged up. Demand for registered brands and warrants was strong due to arbitrage opportunities between SHFE zinc contracts and spot zinc. Spot discounts against SHFE three-month zinc contract prices were between RMB 350-400/mt and with traded prices between RMB 15,400-15,700/mt, but transactions were mainly among traders. Smelters increased goods supply as spot prices rose to RMB 16,000/mt, with supply in the market reported as sufficient.
Recent US economic data has been positive, but euro zone news was disappointing. Despite the return of downstream enterprises to markets, purchasing was still cautious, so LME zinc prices should move between RMB 2,080-2,180/mt, meeting resistance at USD 2,200/mt level. SHFE three-month zinc contract prices should break through RMB 16,300/mt, but with spot discounts expanding to RMB 350-450/mt.
Spot tin prices stabilized between RMB 173,000-175,000/mt last week in Shanghai as a result of steady LME tin prices and stability in both supply and demand. Most smelters had been holding goods, which effectively supported tin prices. Tin supply from Jiangxi was hardly seen before improving slightly on Thursday. Demand in the Shanghai market stayed weak. Trading was relatively active at low end prices and light at high end prices.
In last week’s Shanghai nickel spot market, last week’s average nickel price was RMB 139,120/mt, down RMB 380/mt from a week earlier. Jinchuan Group did not adjust ex-works nickel prices, but domestic spot nickel prices fell steadily due to sluggish demand. As of last Thursday, the price spread between Russian nickel and mainstream traded Jinchuan nickel was between RMB 560-600/mt, still considered narrow. According to market players, current mainstream traded prices of nickel from Jinchuan Group were below trader replenishment costs.
Domestic spot nickel prices are expected to remain below converted LME nickel prices and traders are having difficulties importing Russian nickel since sluggish demand is not expected to improve in the coming week. In this context, SMM expects spot nickel prices will not advance with rising LME nickel prices, but will largely move within the RMB 135,000-148,000/mt range in the coming week.