SMM Daily Review - 2012/3/26 Base Metals Market

SHANGHAI, Mar. 27 (SMM) –

Copper
As LME copper prices stopped falling and began to rally last Friday, the most actively-traded SHFE 1206 copper contract opened RMB 120/mt higher at RMB 60,190/mt Monday. SHFE copper prices continued to fluctuate around the daily moving average during the whole trading day, facing upside pressures at RMB 60,500/mt and only reaching a high at RMB 60,370/mt. In the afternoon session, weak Shanghai Composite Index and the falling LME copper prices dragged down SHFE copper prices, which came under pressure at the daily moving average and slid to as low as RMB 60,060/mt. Finally, SHFE 1206 copper contract prices closed at RMB 60,180/mt, up RMB 430/mt or 0.72%, but with technical indicators pointing downward. Positions for SHFE 1206 copper contracts decreased by 8,228 lots, and trading volumes fell by 51,346 lots to less than 210,000 lots during the whole trading day, highlighting low market activity. SHFE copper prices faced increasing technical pressures.

SHFE copper prices fluctuated in a narrow band after a high open, restricting some hedged copper to come into spot copper markets. However, cargo-holders of imported copper kept moving goods for cash generation as March ends, helping overall market supply remain stable. In this context, spot copper discounts expanded slightly to between negative RMB 320-250/mt in the morning session. Traded prices for standard-quality copper were between RMB 59,450-59,500/mt, and RMB 59,500-59,600/mt for high-quality copper. Downstream producers took a wait-and-see sentiment on Monday, so market transactions were mainly conducted by traders. In the afternoon business, SHFE copper prices drifted lower, but spot copper discounts were little changed, while traded prices declined to between RMB 59,350 -59,500/mt with modest market activity.

SMM conducted a survey with regard to copper price trends this week.

Based on the survey, 19% of market insiders are optimistic about the outlook. According to the US Geological Survey (USGS), a 7.2 magnitude earthquake struck central Chile Sunday, where some important copper mines are located, which can provide momentum for copper prices to rebound. Gold prices have fluctuated at highs recently, while crude oil prices also stand high due to political factors. The US dollar tends to retreat following several days’ fluctuations and resistance at 80, bolstering low-end copper prices. LME copper inventories have been falling, and SHFE copper inventories also ended the nearly 2-month increasing trend last week. In this context, these market insiders expect SHFE copper prices will probably soar through RMB 60,500/mt and that LME copper prices may break USD 8,450/mt.

13% of insiders are pessimistic. They hold the view the macroeconomic news fronts in the US and Europe have too many uncertainties, and the US and European stock markets are on a downside track, dragging copper prices down. Imported copper used for financing purpose will continue to impose pressures to spot copper markets, so spot copper discounts are unlikely to narrow. Cash flow problems are becoming more pronounced as March ends, which will depress copper consumption. Combined with weak Chinese stock markets, these insiders believe SHFE copper prices will lose RMB 59,500/mt this week, and that LME copper prices will slide below USD 8,350/mt.

The remaining 68% of market insiders, though, anticipate copper prices will continue to fluctuate near current values. Despite progress in Greek debt issues, debt problems in Spain, Portugal, and other euro zone countries are resurfacing, adding to market uncertainties. The US recently announced mixed economic figures, highlighting that the road for the US economic recovery is still uneven, with the release of this week’s durable goods orders and final 4Q GDP data brought into spotlight. Both LME and SHFE copper prices are suffering great technical resistance, but have showed strong resilience. As such, these insiders believe LME copper prices will continue to fluctuate around USD 8,400/mt and SHFE copper prices RMB 60,000/mt.

Aluminum
The most active SHFE aluminum contract for June delivery opened higher at RMB 16,210/mt but failed to break through the 10-day moving average. The light metal nevertheless retained gains of RMB 40/mt or 0.25% settling at RMB 16,235/mt the 5-day moving average. Such gains, however, were mainly contributed by profit-taking by shorts, with positions dropping 584 lots to 44,074 lots. SMM expects the contract to test support at the RMB 16,200/mt mark in the near term.

Spot aluminum traded between RMB 15,980-16,000/mt in Shanghai, at discounts of RMB 30-50/mt over the SHFE current-month aluminum price. Goods holders have been holding back inventories in light of a rebound in SHFE aluminum and also backed by sufficient capital reserve despite financial settlements at month’s end. Though quotations were held at RMB 16,000/mt, most deals were struck between RMB 15,980-15,990/mt as weak demand exerted a stronger influence.

In an SMM survey on this week’s aluminum prices, 28% market players included are optimistic and expect a breakthrough to above RMB 16,000/mt in the hope of a recovery of demand in 2Q. The majority 61% respondents expect stability, though, citing stagnating SHFE aluminum prices, failed upward attempts of LME aluminum and low buying interest for higher prices. Remaining 11% respondents put the light metal on the negative side and expect aluminum spot to slip to near RMB 15,950/mt given weakness in global economies and tight cash flow at month’s end.

Lead
On Monday, SHFE 1206 lead contract became the most active one with prices opening at RMB 15,645/mt and fluctuating up to RMB 15,680/mt. However, prices met resistance at the 5-day moving average and rolled back earlier gains in the afternoon due to the falling domestic stock markets and LME lead prices. SHFE lead prices finally closed at RMB 15,570/mt, down RMB 30/mt. Trading volumes decreased by 408 lots to 302 lots and positions were up 150 lots to 1,942 lots.

Domestic spot prices rose by RMB 50/mt compared with last Friday. Well-known brands such as Chihong Zn & Ge and Chengyaun were quoted at RMB 15,730-15,750/mt, with premiums over the most active SHFE lead price maintaining at RMB 100/mt. Quotations for other brands including Dongling were at RMB 15,700/mt, and Shenqian was quoted around RMB 15,680/mt. In the afternoon, lead market remained quiet and quotations were rarely reported. With declines in lead prices arrested, buying interest downstream turned lower, leaving limited transactions.

Regarding to the market trends this week, 73% market players believe domestic lead prices should continue to fluctuate. Currently, no further risk events offering clear directions will likely be reported, and the US dollar index is still hovering around 79.5. In domestic spot markets, downstream demand remained soft, leaving light trading. Wait-and-see sentiment should dominate the market given the uncertain market outlook. As such, lead prices are expected to be between RMB 15,650-15,850/mt.

The rest 27% market players were relatively pessimistic. On one hand, the PMI drop in both euro zone and China released last week reflected the weakening demand in both areas, depressing market confidence. On the other, with the completion of inspections at smelters in Guangxi, such as Hechi Nanfang Nonferrous Metals Smelting, some smelters were permitted to resume production. This may intensify the supply surplus against the soft demand. In addition, smelters will be more willing to sell goods in exchange of cash flows during this last week of the month. Thus, these market players expect lead prices will be between RMB 15,500-15,700/mt this week.

Zinc
SHFE three-month zinc contract prices moved narrowly between RMB 15,600-15,650/mt in the morning session after opening slightly higher at RMB 15,640/mt on Monday. The US dollar index strengthened strongly in the midday, pushing LME zinc prices down. As a result, SHFE three-month zinc contract prices plummeted below RMB 15,500/mt in the afternoon session and faced strong short selling pressures at the end of trading, with prices finally closing at RMB 15,490/mt, down RMB 90/mt.

In the spot market, #0 zinc was traded near RMB 15,400/mt at discounts between RMB 240-260/mt against SHFE three-month zinc contract prices, while #1 zinc was traded between RMB 15,300-15,350/mt at discounts of around RMB 320/mt, with most deals made at the low-end. Downstream buying was muted, with transactions only made between traders. As SHFE zinc prices plummeted in the afternoon, spot discounts narrowed rapidly to near RMB 200/mt, but lower prices failed to boost market buying, with downstream consumers showing little buying interest due to a lack of confidence in future zinc prices.

With regard to zinc price trends this week, 60% market players believe SHFE three-month zinc contract prices should remain fluctuating between RMB 15,600-15,800/mt. Despite Greek problem has eased, the manufacturing industry barely boosted demand for metal. Mixed US home sales data and fluctuating US dollar index will allow LME zinc prices to fluctuate between USD 2,010-2,070/mt in the coming week.

Domestic loosening credit policies and deposit reserve ratio cut are expected. But the market lacks orders and downstream demand given easing cash flow problems. Zinc prices will barely rise but drop limitedly. SHFE three-month zinc contract prices should move between RMB 15,600-15,800/mt, with spot discounts between RMB 300-400/mt.

30% of market players believe SHFE three-month zinc contract prices should move between RMB 15,800-16,000/mt. Despite disappointing PMI in euro zone and China, favorable US employment data enhanced market confidence. The market is expecting improving consumption, believing demand grew as inventories on the SHFE have fallen for two consecutive weeks. LME zinc prices are expected to move between USD 2,070-2,100/mt. Spot discounts will expand to RMB 350-450/mt.

The remaining 10% believe SHFE three-month zinc contract prices should move between RMB 15,400-15,600/mt. concerns improved due to negative PMI, with weak consumption this year. Spot prices were weighed down given LME zinc inventories a high 890,000. Cash flow problems at the end of the month kept transactions quiet. As a result, LME zinc prices should fall between USD 1,980-2,010/mt. Spot discounts will narrow to RMB 250-350/mt.

Tin
Following continuous losses in LME tin prices, the trading band of spot tin narrowed on Monday in Shanghai, with the high end dropping to RMB 170,000/mt while the low-end stayed unchanged. Nanshan and Yunxi struck deals at the lower range of RMB 169,000-169,500/mt. Yunxi and Yunshan concluded most transactions between RMB 169,500-170,000/mt. A few deals at RMB 168,500/mt were done in the morning for Yunshan branded ingots. Quotations above RMB 170,000/mt were heard but no deals struck. The wait-and-see sentiment still prevails at downstream.

In an SMM survey on this week’s tin prices, 60% market players covered expect further losses, citing lasting weakness in LME aluminum, staying weak domestic demand and a lack of support. Remaining 40% respondents have been expecting stability, which they say is backed by high raw material prices and limited supply from smelters.

Nickel
LME nickel prices advanced to hit a high at USD 18,506/mt after opening on Monday, but were weighed down later by short sentiment.

During the morning trading hours in the Shanghai nickel spot market, mainstream traded prices of nickel from Jinchuan Group were in the RMB 133,300-133,500/mt range, and mainstream traded prices of nickel from Russia were in the RMB 132,800-133,000/mt range. During the afternoon trading hours, traded prices of Jinchuan nickel did not change much, while traded prices of Russian nickel advanced to RMB 133,000-133,200/mt range due to tight supply. As spot nickel prices in domestic market were lower than imported nickel prices, supply of imported nickel became tight. Therefore, it is expected that supply of Russian nickel will be tight this week. Overall trading volumes were low amid unclear price trend and cautious trading sentiment on Monday.

Based on result of an SMM survey on market sentiment, 60% market players believe that LME nickel prices will continue to fluctuate in this coming week. Downbeat economic news from the two major economies, the US and the Europe, weighed on base metal prices, including LME nickel prices last week. The unoptimistic conditions of global economy have not improved much last week, and LME nickel prices are at multi-month low and are well below all moving averages. It is expected that the likelihood for LME nickel prices to slip further before release of any negative news is small. The 60% market players believe that LME nickel prices will continue to fluctuate before outcome of Italy and Spanish's government bond auction and the European financial ministers meeting.

30% market players hold that LME nickel prices will continue to drift lower in this coming week, believing that LME nickel price decline is not only a result of sluggish macroeconomic condition, but also due to quiet downstream demand. The oversupply of nickel will not change this week. In addition, LME nickel prices are well below all day moving averages without solid support technically. It is expected that LME nickel prices will continue to fall in the following week.

The remaining 10% market players expect that LME nickel prices will bottom out in this coming week. The European financial ministers will hold a meeting at Copenhagen on March 30-31 to mainly discuss the firewall. According to the eurozone diplomats last Friday, a consensus to raise EUR 700 billion rescue found is quiet likely to be reached at the meeting, which may mitigate market concern and give a boost to LME nickel prices. In addition, RSI indicator suggests that LME nickel prices are oversold technically and may quiet likely to bottom out at appropriate time in the following week.