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SMM Daily Review - 2012/5/7 Base Metals Market
May 8,2012 10:10CST
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As LME copper prices retreated last Friday on the softer US economic data, SHFE 1208 copper contract opened RMB 470/mt lower at RMB 57,680/mt Monday


As LME copper prices retreated last Friday on the softer US economic data, SHFE 1208 copper contract, the most active one, opened RMB 470/mt lower at RMB 57,680/mt Monday, and only hovered around RMB 57,500/mt during the day, with a narrow fluctuating band of RMB 150/mt, given a lack of guidance from LME copper. Slightly increasing Chinese stock markets provided some support for the low-end SHFE copper price. With the lowest and highest price at RMB 57,310/mt and RMB 57,730/mt, respectively, SHFE 1208 copper contract finally settled at RMB 57,590/mt, down RMB 560/mt or 0.96%. Trading volumes for SHFE 1208 copper contract increased by 47,476 lots, and positions added by 13,932 lots. As selling pressures from short investors heightened during the day, SHFE copper prices shied away from major recent moving averages and were likely to lose support at RMB 57,500/mt.

SHFE copper prices retreated by more than RMB 500/mt, but increases in spot copper premiums were limited. Spot copper premiums were quoted between positive RMB 50-100/mt in Shanghai in the morning business. Traded prices for standard-quality copper were between RMB 57,700-57,760/mt, and RMB 57,730-57,800/mt for high-quality copper. Cargo-holders showed unwillingness in moving goods at lower price levels, and cargo-holders of standard-quality copper especially held price quotes firm. Thus, its price difference with high-quality copper was only between RMB 10-20/mt. Supply of low-end hydro-copper was limited. Trader buying interest was restricted owing to small profit margins, while downstream producers stayed on the sidelines as copper prices fell. Market activity was lackluster in the morning as a consequence. In the afternoon, as SHFE copper prices continued to lurch in a narrow band, quotations for spot copper premiums were little changed from the morning levels. Traded prices, though, edged higher to RMB 57,750/mt in the afternoon, and market activity remained muted.

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

Based on the survey, 47% of market insiders are pessimistic about the outlook, believing LME copper will lower to test USD 8,000/mt and move between USD 8,000-8,150/mt and that SHFE copper prices will test RMB 56,500/mt.

Hollande won the French presidential election Monday and has become the first Socialist president in recent 20 years, but he holds different views on solving Europe’s debt crisis with German Chancellor Merkel, igniting market worries over unclear prospects for the European debt issues. Leaders in Greece have previously fought for votes to establish coalition government, but voters chose to support for parties that are against the European Union’s bailout, which has rekindled market fears whether or not the country can introduce necessary measures to stay in the euro zone. This has added more unstable factors to the euro zone’s sluggish economy. Once many economies in Europe slip into a second recession, the euro may hit fresh lows again, probably losing 1.30. The US dollar surged for 5 consecutive days on Monday, and is likely to fluctuate around 80 this week, which will weigh on risky assets. Recent US economic data reveals that the US economic recovery continues to slow, with last Friday’s non-farm payrolls standing below market expectations, causing US equity markets to register the biggest one-day decline since early 2012. Risky assets including LME copper thus suffered sell-offs. Meanwhile, crude oil prices retreated to a three-month low last Friday, losing USD 100 per barrel, foreshadowing a pessimistic financial market. From technical indicators, both LME and SHFE copper prices have declined below major recent moving averages. In Chinese domestic markets, copper demand remains slack, even during the traditional peak demand period, which will also drag copper prices down. 

16% of market insiders expect copper prices to rally this week, with LME copper expected at USD 8,300/mt and SHFE copper at RMB 58,000/mt, with long investor activity in London eyed. The proportion of canceled warrants to total LME copper stocks have stayed high since early May, remaining at 31.91% May 7, while spot copper premiums in London held firm at USD 85/mt on the same day. According to CFTC reports, net long positions for copper increased to 3,890 lots in the week ending May 1 from the previous week’s 2,322 lots. In China, markets expect that the CPI data due this Friday will continue to fall slightly, which will boost Chinese domestic markets and thus support SHFE copper prices. In China’s spot markets, spot copper premiums are high, while cargo-holders quote high prices. In this context, these insiders anticipate copper prices will increase this week.

The remaining 37% insiders predict LME copper prices will continue to hover between USD 8,200-8,300/mt and that SHFE copper prices will lurch between RMB 57,000-58,000/mt. The continuously sliding US employment data indicates an uneven road for the US economic recovery. Bernanke said during the Fed meeting that the Fed would consider adopting stimulus measures to boost the economy should the labor market stagnate. Therefore, the US dollar is likely to remain high. Nevertheless, long investor activity in London prevails. In spot markets, offers for spot copper premiums stand high, even before the delivery date for SHFE 1205 copper contract, but market consumers cannot accept high premiums. As such, these market insiders believe copper prices will hover around current values this week.

Due to weakness in the macro economy, the most active SHFE aluminum contract for August delivery closed down RMB 50/mt or 0.31% at RMB 16,275/mt on Monday. Positions added 1,696 lots to 76,178 lots. Financial markets remained relatively negative. The hike of bauxite exports duties to 20% has already influenced aluminum price performance, which lacks momentum to rise further. Strengthening shorts will force longs to close their positions and the most active SHFE aluminum contract is expected to test support at RMB 16,200/mt.

Shanghai spot aluminum was sold at RMB 16,130-16,160/mt, at discounts of RMB 20/mt to premiums of RMB 10/mt. Wuxi spot aluminum was sold at RMB 16,150-16,170/mt. Hangzhou spot aluminum was sold at RMB 16,120-16,160/mt. The SHFE current-month aluminum contract showed resilience and consolidated at the 5-day moving average. The bullish sentiment strong was strong in the spot market, most traders narrowed discounts and small premiums were even seen for some aluminum ingot brands due to tight supply. But as downstream processing enterprises mostly stood on the sidelines early in the week, their willingness to buy was limited. Most deals were done at the low end. The overall atmosphere is dull.
This week’s SMM research covered 40 aluminum traders. 10 are optimistic, 23 are neutral and 7 are pessimistic.

This week 10 traders are bullish, accounting for 25% of all respondents. They said aluminum prices may still edge higher, as on the one hand Indonesia’s higher bauxite export duties increased costs at domestic alumina producers, which will be transmitted to aluminum prices. There will also be market speculation to push up aluminum prices. The current month SHFE contract showed resistance for loss and, under external negative news, still found support at the 60-day moving average. That indicates spot aluminum may still be able to touch RMB 16,200/mt in the short term.

There are 23 traders who see flat performance, accounting for 57% of all traders. They said, although aluminum prices slightly rose recently, especially after the May Day holiday when spot aluminum price rose near RMB 100/mt, higher aluminum prices failed to led downstream consumption higher. Consequently, aluminum lacked upward momentum and met deadlock. Pressure comes from weak consumption and higher alumina prices, which will cause large ups and downs in aluminum prices. SHFE aluminum prices are fluctuating narrowly due to speculation activities and a negative environment. The current-month contract is moving in RMB 16,100-16,200/mt. The most active contract is near RMB 16,300/mt.

There are 7 bearish traders, accounting for 18% of all respondents. They said recently more uncertain factors appeared, especially that euro zone manufacturing data and its overall debt status are not optimistic, which dragged down LME aluminum prices. Under impact from LME aluminum, SHFE aluminum prices will inevitably slip. On the fundamentals, high stocks and weak demand in the conventionally peak period will drag lower spot aluminum prices. Last week’s average aluminum price of RMB 16,140/mt is hard to counter so many negative news. For the short term, spot aluminum may return below and stagnate under RMB 16,100/mt.

SHFE lead prices fell to around RMB 15,680/mt soon after gapping lower at RMB 15,700/mt on Monday, and then moved narrowly for the whole day to finally close at RMB 15,710/mt, down RMB 90/mt. Trading volumes were down 104 lots to 108 lots, and positions were up 38 lots to 1,442 lots.

In China’s domestic markets, quotations for Chihong Zn & Ge and Chengyuan were mainly at around RMB 15,650/mt, and Tongguan was quoted at RMB 15,620/mt, with discounts against the most active SHFE lead prices narrowing from RMB 100/mt to RMB 50-70/mt. Shuangyan was quoted at RMB 15,550/mt, and offer for Shenqian was around RMB 15,500/mt. Transactions were modest despite improved selling interest among dealers.

As for price trends this week, 73% industrial insiders believe spot lead prices should remain between RMB 15,600-15,750/mt due to mixed economic data and directionless market. US April nonfarm payrolls was reported lower than expected, but rose by 115,000 from the previous month, so investors should remain cautious and SHFE lead prices may move within a narrow band. In domestic spot market, demand from end consumers was sluggish, leaving fewer purchases. Thus, lead prices will not likely change significantly this week.

The remaining 27% market players are not optimistic, noting that European debt concerns may be reignited and risk aversion will increase since the US economy remains weak and since Francois Hollande, France’s New President, asked other European leaders to renegotiate the fiscal treaty aimed at resolving European debt crisis. Thus, chances are that lead prices will fall below RMB 15,500/mt this coming week.

On Monday, SHFE 1208 zinc contract opened lower at RMB 15,515/mt after becoming the most actively-traded contract. In the morning session, SHFE three-month zinc prices slid to RMB 15,420/mt, and with intense struggles between shorts and longs for the whole day. Finally, the most actively-traded zinc contract in the SHFE market closed at RMB 15,450/mt, down RMB 125/mt. Transactions were up 10,000 lots to 84,276 lots, and positions were up 8,224 lots to 129,176 lots.

In the spot market, prices were slower to drop despite losses in the SHFE zinc market. Spot discounts of #0 zinc were between 100-120/mt over SHFE three-month zinc contract prices, with deals between RMB 15,280-15,320/mt. #1 zinc was traded at RMB 15,250/mt. Narrowed discounts promoted some arbitrage trades, but downstream producers remained wary of purchases due to the pessimism.

Zinc prices edged up slowly during the May Day holiday, and then gave back previous gains.

With regard to zinc price trends this week, 50% market players believe zinc prices should continue to fluctuate. The HSBC China’s April manufacturing PMI rose, but remained below 50%, a sign of the lack of strong domestic growth, and meanwhile export consumption will barely improve given the poor PMI in the euro zone area. On the other hand, due to US worse-than-expected non-farm data, the US dollar index surged, pushing down LME zinc prices. LME zinc prices should move between USD 1,980-2,020/mt this week. Goods supply available in the market is tight as smelters are holding goods, with narrow spot discounts, and keeping prices firm. Imported zinc was consumed. As such, SHFE 1208 zinc contract prices should move between RMB 15,400-15,500/mt, with spot discounts narrowing to RMB 120-150/mt.

Approximately 30% market participants believe zinc prices should fall further. Major economies are depressed, while US non-farm employment data was sluggish for the third straight month. New French president is opposed the former in European debt issue, and markets are concerned that he will reduce support to eurozone debt-ridden countries. LME zinc prices should fall to USD 1,950-1,980/mt. domestic demand is growing slowly, while downstream buyers purchase modestly. Trading volumes and positions of SHFE zinc contract decreased sharply recently, with a lack of capital support. As such, SHFE 1208 zinc contract prices should fall to RMB 15,300-15,400/mt, with spot discounts narrowing to RMB 100-120/mt. 

The remaining 20% believe zinc prices should rise this week. The outperformed LME copper and lead prices will support LME zinc prices. LME zinc prices should move between USD 2,020-2,050/mt. The market is expecting China’s CPI, which will be released this week, will continue to fall, while speculations that China will cut deposit reserve ratio brace the market. In this scenario, SHFE three-month zinc contract prices should rise to RMB 15,500-15,600/mt, with spot discounts expanding to RMB 150-170/mt.

In Shanghai tin market, mainstream traded prices were between RMB 162,000-164,500/mt on Monday, with a few transactions made at RMB 161,500/mt in the afternoon. Spot market further depressed due to the falling LME tin prices. Nanshan, Jinlong were mainly traded between RMB 161,500-162,000/mt, while most transactions for Yunxiang and Yunxi were concluded between RMB 162,500-163,500/mt. Low-end prices staged further downtrend. Weak LME tin price and strong wait-and-see sentiment left trading modest.

With respect to the market outlook, 90% of market players believe tin prices should fall further this week. The continuous declines in LME tin prices depressed market confidence, coupled with the remaining poor orders at enterprises downstream, buying willingness was still low in spot tin market. Given the lackluster trading, dealers were not optimistic on market outlook. Lower selling interest among most smelters did not help boost tin prices. However, many market players still hold that prices should gain support at the RMB 160,000/mt level. In this context, the decrease of tin prices should be limited this week.

10% of market players believe tin prices will remain stable this week, noting that goods circulating in the market will be fewer since smelters were not actively moving goods. Besides, spot prices may obtain certain support if LME tin prices hold at USD 21,500/mt.

On Monday, mainstream traded prices for Jinchuan nickel were RMB 130,500-130,800/mt in the Shanghai nickel market, and RMB 128,500-128,800/mt for Russian nickel. Due to the lack of direction from LME nickel market, cautious attitude dominated the market, with low trading reported.

According to a recent SMM survey of price movements this week, 70% market players expect nickel prices to weaken. The newly-elected French President has triggered market concerns over the outlook for the European debt issues by the two major powers in the region. Meanwhile, the data shows that voters in Greece favor the party who opposes the austerity plan, and this has also ignited market fears that the country may break up earlier promises made for international aid.   In this scenario, the US dollar index opened stronger at 80, a sign of market risk aversion. Besides, LME nickel inventories grew 516 mt last Friday, and high inventories will also add downward pressures to nickel prices. Collectively, LME nickel prices will be weak for the foreseeable future.

Approximately 30% market players believe nickel prices will continue to fluctuate this week, as high nickel ore prices will support nickel prices. In early 2012, LME nickel prices tumbled to USD 17,134/mt due to the Greece debt issues, and the existing price is approaching to the mark. Coupled with improved economic conditions, markets should not be too pessimistic towards the outlook.


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