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SMM Weekly Review and Forecast (May 2-4)
May 7,2012 17:06CST
smm insight
SMMI was down 0.13% last week led by a 2.15% decline in SMMI.Ni.

SHANGHAI, May 7 (SMM) – Last week, China’s April PMI data was reported up from a month ago, but enterprises downstream were still suffering slowdown. This coincided with the sharp contraction of euro zone PMI data, compounding European economic worries. Meanwhile, the US PMI hit a 16-month high, but its non-manufacturing index was lower than previous figure and market expectation, boosting the US dollar index to 79.37, and in turn, weighing on base metals. As such, SMMI was down 0.13% last week led by a 2.15% decline in SMMI.Ni. SMMI.Cu, being relatively resilient, fell slightly by 0.07%, while SMMI.Al managed to remain the upward trend, showing an increase of 0.69%.

The China Securities Regulatory Commission (CSRC) announced during the May Day holiday that it would cut handling fees for stock futures market traders, boosting commodity markets. Since cash flow problems eased slightly in early May, the Shanghai Composite Index stabilized at 2,400. However, SHFE copper prices were still volatile and after initially rising to RMB 58,950/mt, began falling as sell-offs began. SHFE copper prices slid through the 5 and 20-day moving averages, and fell as low as RMB 57,900/mt on Friday, only finding support at the 10-day moving average. New positions for SHFE 1208 copper contracts increased by 25,000 lots during the first two trading days of the week, but trading volumes then fell slightly, a sign of cautious investor sentiment.

In spot markets last week, the SHFE/LME copper price ratio retreated to near 7.05, expanding losses for imported copper. In response, imported copper cargo-holders held goods and caused supply to fall. Domestic copper cargo-holders held prices firm, so spot copper discounts narrowed gradually and turned to premiums, and with some high-quality copper quoted at premiums of RMB 100/mt last Friday. Standard-quality copper also traded at a premium of around RMB 50/mt as its price difference with high-quality copper became smaller. Spot copper supply was reported tight last week. Speculators aggressively bought high-quality copper which could be delivered, but then slowed purchases on Friday as premiums rose. Despite some purchasing at the lows, downstream producers were still cautious, leaving market transactions dominated by speculators. 

Easing cash flow pressures and rising Chinese stock markets will boost market sentiment and lift SHFE copper prices in the coming week.  

Spot aluminum stocks did not increase following the May Day holiday. Due to transportation delays, aluminum stocks dropped in Guangdong. Domestic alumina prices climbed due to rumors of Indonesian export restriction, which in turn helped aluminum prices rebound. The most active SHFE aluminum contract climbed from RMB 16,200/mt up to RMB 16,425/mt, posting gains even as other base metal prices fell, and receiving support from both market fundamentals and capital inflows. While resistance is still felt at the 60-day moving average, strong support was found at RMB 16,300/mt.

Spot aluminum prices climbed by more than RMB 100/mt last week, which has only three trading days due to the May Day holiday, as the light metal headed toward RMB 16,200/mt. Most deals were done at slight discounts over the current-month SHFE aluminum price, however, on account of weak demand and as goods holders and buyers split.

Aluminum market fundamentals are improving in China, in stark contrast to LME aluminum, which is expected to continue struggling at USD 2,100/mt. The most active SHFE aluminum contract will test resistance at RMB 16,500/mt if longs continue to expand. Spot aluminum has been relatively stable and its low-end price will likely to return to RMB 16,100/mt. Most deals will be made close to current-month SHFE aluminum price, but if SHFE aluminum continues to strengthen, spot aluminum prices could rise above RMB 16,200/mt.

Last week, SHFE lead prices, influenced by the gains in LME lead prices during the May Day holiday, rose as high as RMB 15,950/mt after opening Wednesday, but met resistance and fell back to RMB 15,820/mt. SHFE lead prices are expected to move in the RMB 15,700-16,000/mt range this week.

Last week, China’s domestic spot prices remained between RMB 15,620-15,800/mt, with discounts of RMB 100/mt over the most active SHFE lead contract price. Trading was light at the higher prices, and downstream buyers only purchased moderately when prices fell. Most smelters reported poor transactions. Demand will not likely improve before the next peak-demand season. Downstream buyers should still purchase on an as-needed basis this week, while smelters will likely maintain normal sales with traded prices expected between RMB 15,650-15,850/mt.

Market supply was insufficient since smelters have been holding goods and imported zinc has been consumed, causing spot discounts to narrow, but leaving spot prices firm. Last week there were only two trading days, so downstream buyers entered the market on Thursday as zinc prices fell and since they had consumed stocks during the holiday. However, due to narrow discounts, arbitrage activity was quiet.

Inventories grew slightly following the May Day holiday. Inventories in East China grew 1,000 mt to 477,400 mt, inventories in South China were up 200 mt to 100,500 mt, and inventories in North China grew rose 1,000 mt to 16,000 mt. Total inventories grew slightly due to low operating rates at smelters. LME inventories were up significantly at 920,000 mt.

There were only three trading days last week due to the May Day holiday. Domestic tin prices moved up to RMB 164,000/mt on the first trading day following the holiday due to the rising LME tin prices and limited supply, with high-end prices remaining stable. On the last two days, spot tin prices presented a weak trend due to falling LME tin prices. Transactions became even quieter with strong wait-and-see sentiment in the market. Mainstream traded prices were between RMB 163,000-165,000/mt, with a few brands quoted at RMB 162,500/mt.

Last Friday, the average spot nickel price was RMB 130,116.7/mt, and down RMB 623.3/mt from the previous week. LME nickel prices were down sharply, but spot nickel prices fell slower due to support from Jinchuan ex-work prices. Downstream buyers needed to replenish stocks following the May Day holiday, causing trading volumes to increase on Wednesday. However,  since spot prices fell slowly, transactions became quiet as the week progressed.

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