SMM Weekly Review and Forecast (Apr. 16-20)

SHANGHAI, Apr. 23 (SMM)–Market fears the European debt crisis may widen again were growing last week, as Spanish bond yields soared and could drag down Europe's economy. The US dollar thus increased above 80. However, upbeat economic data in the US boosted US equity markets and helped base metals rally from early lows, paring the previous week's losses. SMMI slid by 0.66%, with tin and nickel posting the biggest declines. SMMI.Ni lost 1.88%, while SMMI.Sn fell by 1.79%. Aluminum, though, reversed the previous drops, and SMMI.Lv also rebounded slightly by 0.22%.

Copper
The recent expansion of the currency trading range for the RMB and market expectations that China's Central Bank would cut the bank reserve requirement ratio (RRR) caused the Shanghai Composite Index to rally to near 2,400 and close with a 1% gain. In response, SHFE copper prices moved steadily higher after opening low early last week, fluctuating around RMB 57,000/mt and with a low of RMB 56,490/mt, helping the SHFE/LME copper price ratio improve slightly. Overall positions exceeded 530,000 lots. SHFE copper prices were stable at the daily moving average before moving towards the 10-day moving average, but failed three times to break through RMB 58,000/mt, an indication of the growing bearish sentiment.

In spot markets last week, overall copper supply remained stable after SHFE 1204 copper contracts were delivered. Spot copper premiums narrowed gradually and turned to discounts late last week when copper futures prices rebounded. The lack of a clear price gap among SHFE copper contracts left limited room for speculators. Cargo-holders opted to hedge against copper price trends amid falling prices. Traders favored high-quality copper and increased purchases of that raw material given current discounts. Cargo-holders of domestic standard-quality copper were reluctant to sell and insisted on higher prices. Downstream producers purchased aggressively early last week at prices below RMB 57,000/mt, but later in the week were turning cautious as prices rose to around RMB 57,500/mt. As a result, market transactions rose first and then fell last week. 

SHFE copper prices should break through RMB 58,000/mt and possibly move above the 10-day moving average in the coming week.

Aluminum
The most active SHFE aluminum contract for July delivery gapped lower last Monday and failed to completely cover in the face of strong resistance at RMB 16,100/mt. The contract hit a low of RMB 16,030/mt and is expected to test support at RMB 16,000/mt in the near term.

Spot aluminum prices tracked SHFE aluminum on Monday and fell to a low of RMB 15,920/mt, but later returned to near RMB 16,000/mt backed by gains in the Shanghai Composite Index rose and low selling interest at low-end prices. The rebound ran out of steam at the RMB 16,000/mt mark, however, on weak demand and a poor future outlook.

Investor risk appetite has weakened as Spanish government debt issues emerge and due to, continued economic weakness in the US and China and hard-to-predict monetary easing. Risk aversion, however, will help the US dollar index stabilize near 79.5, if not strengthen further, but keep aluminum prices in a narrow band.

The price range for LME aluminum in the coming week should be between USD 2,020-2,100/mt, and the most actively traded SHFE aluminum contract will likely hover between RMB 16,000-16,150/mt. Spot aluminum prices still lack momentum to break through RMB 16,000/mt, and should trade at discounts of RMB 10/mt to premiums of RMB 30/mt over the current-month SHFE aluminum contract. Trading volumes will not improve as downstream enterprises continue to purchase on an as-needed basis.

Lead
Last week, SHFE lead prices, influenced by rising domestic stock markets, rose to RMB 15,750/mt, up from an early-week low of RMB 15,530/mt. This week, SHFE lead prices may move between RMB 15,570-15,780/mt.

China's domestic spot lead prices were mainly in the RMB 15,550-15,680/mt range, with only Yunyue brand from Gejiu region quoted lower between RMB 15,470-15,510/mt. Smelters maintained normal sales, but downstream buyers only purchased on an as-needed basis and showed little interest in low-priced goods. This week, quotations for branded lead should be between RMB 15,600-15,750/mt, close to SHFE lead prices. With lead prices beginning to stabilize and cash flow issues growing as the end of the month nears, smelters and dealers will become more active moving goods. However, buying interest from downstream enterprises will not likely improve during the slow-demand season, especially since electric vehicle orders remain sluggish.

Zinc
In domestic spot markets, smelters were holding back goods as SHFE zinc prices plunged early in the week, and this action, combined with tight supply during the delivery week, allowed spot prices to remain firm. Spot discounts against SHFE three-month zinc contract prices narrowed to RMB 180/mt early in the week, with spot prices struggling between RMB 15,150-15,200/mt. As SHFE zinc prices rose, spot discounts expanded to RMB 200-241/mt, pushing up spot prices to RMB 5,250-15,350/mt. Downstream buying interest was low due to market pessimism and investors selling off goods.

Spot zinc prices on the LME have recently fluctuated around USD 2,000/mt, while imported zinc concentrate supply remains low and with TC down due to falling metal prices. Domestic smelters will likely move below cost lines from purchasing imported ore with TC below USD 80/mt, so trading sentiment was pessimistic despite demand for raw material. TC for domestic zinc concentrate was between RMB 4,400-4,900/mt and relatively low due to advantages compared to imported ore. Domestic zinc concentrate prices were firm given strong demand from smelters.

Last week, spot prices were down from the previous week, so some downstream buyers rushed into the market, causing inventories to fall. Inventories in East China fell 5,000 mt, to 481,400 mt, inventories in South China fell by 3,300 mt, to 107,500 mt, and inventories in North China fell by 1,000 mt, to 15,000 mt.

Tin
Last week, domestic tin prices continued a downward trend, with mainstream traded prices falling to RMB 164,000-165,500/mt last Thursday, down from the RMB 166,500-169,000/mt on the previous Friday. Since low-priced goods dropped further, low-end prices edged up to RMB 164,500/mt last Friday. Smelters were reluctant to move goods due to the falling prices, while traders were unwilling to replenish in large amounts, leaving fewer goods supply in the market. Demand downstream was soft with market remaining cautious.

Nickel
Last week, Jinchuan Group cut ex-work nickel prices by RMB 4,000/mt, to RMB 130,000/mt, and by Friday, the average spot nickel price was RMB 131,710/mt, up RMB 370/mt from a week earlier. LME nickel prices continued to fluctuate in a narrow band, while spot nickel prices were also relatively unchanged. Since spot prices were much lower than Jinchuan's ex-work prices, traders were holding onto goods, keeping transactions quiet. The market remained cautious after Jinchuan adjusted prices on Tuesday, keeping trading volumes low.