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SMM Daily Review – 2012/5/14 Base Metals Market
May 15,2012 10:28CST
smm insight
SMM conducts a survey over metals movements this week.

Shanghai, May 15 (SMM) -
The most active SHFE 1208 copper contract started at RMB 57,580/mt Monday, slightly higher by RMB 130/mt, but then began falling down following temporary struggle as LME copper lost USD 8,000/mt. Besides, increasing positions and trading volumes, as well as the falling Chinese stock markets also brought pressures on SHFE 1208 copper contract, which fell to a low at RMB 56,150/mt in the afternoon, a fresh low since Chinese New Year, basically hovering weakly around RMB 56,300/mt. SHFE 1208 copper contract finally ended at RMB 56,260/mt, down RMB 1,190/mt or 2.07%. Positions and trading volumes for SHFE 1208 copper contract added by 19,924 lots and 220,000 lots, respectively, and those for SHFE 1209 copper contract increased by 30,548 lots and 102,000 lots, respectively. With growing selling pressures, SHFE copper prices are likely to test support at lower levels for the foreseeable future. 

As SHFE copper prices trended lower after a high open, and as the delivery date for SHFE 1205 copper contract neared, cargo-holders insisted on premium quotes, despite sluggish market transactions. Copper prices fell by more than RMB 500/mt after 10 am, so hedged copper came into markets in large quantities, causing spot copper premiums to slide. Offers for spot copper premiums were between positive RMB 10-80/mt in Shanghai in the morning business. Traded prices for standard-quality copper were between RMB 57,050-57,150/mt, and RMB 57,120-57,250/mt for high-quality copper. As SHFE forward copper contract prices were noticeably down, bearish sentiment was growing in markets. In the afternoon session, SHFE copper prices continued to sink, but spot copper supply remained sufficient. In this context, quotations for spot copper premiums failed to increase in the afternoon, reporting between positive RMB 20-80/mtk, while traded prices were between RMB 56,900-57,100/mt. 

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

Based on the survey, 56% of the market insiders are pessimistic over the outlook, believing LME copper will test a fresh low at USD 7,800/mt and that SHFE copper will fall to around RMB 55,000/mt. Europe's prospects are uncertain. A week ago, 70% of voters in Greece rejected the plan to cut the country's budgets sharply to exchange for bailout fund from the EU and IMF, and the efforts to establish a coalition government have also failed, rekindling market fears that Greece may leave the euro zone area. The political upheaval in Europe is likely to cast shadows over the global economic outlook in the coming few months and even years, and the euro will also remain soft. J.P. Morgan announced last Thursday that the company has recently suffered losses of at least USD 2 billion, dampening the already weak markets. According to foreign media reports, Moody's will start to lower credit ratings to about 100 banks this month, including BNP Paribas, Deutsche Bank, and Morgan Stanley. This will be extremely negative for global economic prospects and depress buying interest. In Chinese domestic markets, despite China's cut in the RRR last Saturday, commodity markets are not boosted, which will drag SHFE copper down. Since SHFE near-term copper contract prices are higher than forward contract prices, more investors are buying spot copper and selling copper futures contracts, which will restrict any upward movement in SHFE copper prices. Moreover, downstream consumers will keep cautious ahead of the delivery day for SHFE 1205 copper contract, while both hedged copper cargo-holders and speculators will step up sale volumes given falling prices, which will lead to market surplus. High spot copper premiums are unlikely to extend following the delivery day, which will have a weakening support for copper prices. Hence, these insiders expect copper prices to fall this week.

15% of market insiders are optimistic, expecting LME copper may rebound to around USD 8,100/mt and that SHFE copper will increase to around RMB 58,000/mt. Long investor activity is still active, and news was reported that China's copper smelters and trading firms will delivery copper to LME warehouses. Copper premiums in London remain high. Besides, the Michigan Consumer Sentiment Index hit a 4-year high in May, suggesting that the US economy is improving. Markets are also positive towards the US consumer price index and NY Empire State Manufacturing Index to be announced this week, so US equity markets will likely rally from the lows and help copper prices increase. From technical indicators, copper prices will make corrections following previous drops.

The remaining 29% of market insiders hold the view copper prices will be mired at current values. LME copper should hover around USD 8,000/mt, while SHFE copper prices will lurch around RMB 57,000/mt. Despite the existing long investor activity, the struggle between long and short investors prevails. Combined with selling pressures, copper prices will fluctuate this week. In Chinese domestic markets, China's cut in the RRR means it will bring liquidity of around RMB 420 billion to markets, which will lift markets over the short term. China's imports of unwrought copper and copper semis were 375,000 mt in April, down 87,000 mt from March, but up 42.9% YoY. China's refined copper output was 491,000 mt in April, up 5.1% YoY, but the growth rate is only 8.1% from January to April, the second lowest since 2004. A drop in copper imports indicates weak domestic consumption, while a decline in output means that market surplus has improved some. Therefore, these insiders anticipate copper prices will be little changed from current levels this week.  

The Chinese central bank announced in the evening of May 12 to cut banks’ reserve requirement by 0.5 percentage point from May 18, a second cut this year and a signal that monetary policies will continue to loosen as necessary. However, investor worries towards implementation of austerity measures in Europe due to political uncertainty in the region overshadowed support from China. The most active SHFE aluminum contract for August delivery opened slightly higher at RMB 16,090/mt and hit a high of RMB 16,150/mt, but finally closed down RMB 80/mt or 0.5% at RMB 15,990/mt as short selling strengthened. Positions added 2,554 lots to 102,524 lots. Losses were seen in both stocks and futures markets. Though SHFE aluminum shed less losses compared with other base metals, contracts for near month delivery slipped immediately below RMB 16,000/mt, triggering a strong bearish market sentiment. The macro economy should stay on the negative side, indicating stronger pressure at RMB 16,000/mt for the most actively traded contract.

Spot aluminum traded at RMB 16,000-16,030/mt in Shanghai, at premiums of RMB 20-50/mt over the current-month SHFE aluminum contract. Traded prices of spot aluminum were RMB 16,010-16,030/mt in Wuxi and RMB 15,990-16,020/mt in Hangzhou. Premiums expanded to RMB 50/mt as goods holders held quotations at RMB 16,000/mt. Buying was quite weak, however, leading to extremely light trading.

SMM’s recent survey on this week’s aluminum prices covered 42 traders. 20 are neutral and 22 pessimistic.

There are no optimistic traders in this week’s survey, highlighting worries of domestic traders. The number of pessimistic traders increased from 7 to 22, accounting for 52% of all respondents. These traders said spot aluminum saw discounts changing into premiums, showing stability in aluminum spot. It has also received support from large aluminum businesses and traders. However, as news from overseas markets is still negative, the European debt crisis is still unclear and Greece’s euro zone exit triggered speculation. The US dollar index also hit a new high, weighing on LME aluminum prices, which may slip to USD 2,016/mt, a new low this year. In the domestic market, though the reserve requirement cut confirms loosening monetary policies, downstream demand stays weak. The current-month contract dropped for 8 successive trading days as a result of development in overseas markets. Spot demand in the peak-demand season is still weak, weighing on aluminum prices. These traders expect aluminum prices to drop below RMB 16,000/mt in the near term.

Remaining 20 traders expect aluminum prices to stabilize this week. These traders acknowledge aluminum prices are pressured in the near term, but also expect stability given support at the bottom, higher bauxite duties in Indonesia, possible supply cut by large aluminum businesses when prices fall, weaker impact from Europe as some risk aversion demand has already been met, a reserve requirement cut by Chinese central bank and resumption of real estate and rail transportation projects. They expect aluminum prices to stay at RMB 16,000-16,100/mt this week.

SHFE three-month zinc contract prices opened at RMB 15,195/mt on Monday. Domestic stocks market dropped after opening after digesting the news of the reduction in the reserve requirement ratio by China’s central bank. As a result, the most actively-traded zinc prices in the SHFE market slid below RMB 15,000/mt to RMB 14,910/mt. Supported by buying activities at lows, SHFE zinc prices returned RMB 15,000/mt. Finally, SHFE three-month zinc prices finished at RMB 14,970/mt, down RMB 225/mt, or a drop of 1.48%. Trading volumes were up more than 2,000 lots to 146,478 lots, and positions were up 3,766 lots to 170,570 lots.

In the spot market, prices were firm despite of losses in the SHFE zinc market. Spot discounts of #0 zinc narrowed to RMB 80-100/mt over SHFE 1208 zinc contract prices, with deals between RMB 14,950-14,980/mt. Prices of #1 zinc held at RMB 14,950/mt due to limited supply. The diving SHFE zinc prices stimulated downstream buying interest, but market supply was not sufficient, resulting in brisk inquiries only.

China’s central bank announced last Saturday it will cut deposit reserve ratio starting May 18th. But SHFE zinc prices opened slightly higher and plunged to RMB 15,000/mt level on Monday.

70% of market players believe SHFE zinc prices should dip to a new low for the year between RMB 14,700-14,900/mt this week. Major economies are faced with difficulties, while Spain’s government bond yields remain high, and Greece’s coalition government is expected to collapse. Despite US CCI released last Friday was positive, its PPI fell for the first time since December 2011, combined with LME inventories a high 930,000 mt, the US dollar index should move between 80.0-80.5. LME zinc prices should fall to USD 1,900-1,920/mt. Despite China’s central bank will lower deposit reserve ratio, positive news have been released, so the market is concerned over domestic economic situation. In addition, consumption in 2Q grows slowly, and domestic spot zinc inventories are high. In this context, SHFE three-month zinc contract prices should fall to RMB 14,700-14,900/mt, with spot discounts narrowing to RMB 50-80/mt.

20% believe SHFE three-month zinc contract prices should struggle at the RMB 15,000/mt. Despite negative economic environment and market concerns, some smelters will place orders due to lower LME zinc prices. The US dollar index has stood at 80, meeting resistance at the level. LME zinc prices should move between USD 1,920-1,950/mt. But spot prices will be well supported. Although inventories are high, goods supply available in the market is tight as smelters are holding goods, with spot prices resisting declines. Arbitragers released goods modestly due to low discounts. As such, SHFE three-month zinc contract prices should move between RMB 14,900-15,200/mt, with spot discounts between RMB 80-120/mt.

The remaining 10% believe due to favorable SHFE/LME zinc price ratio, arbitragers will actively purchase goods, pushing to LME zinc prices to USD 1,950-1,980/mt. on the other hand, cash will flow to the futures markets due to loosening monetary policies and constraints in the real estate sector, SHFE three-month zinc contract prices should rally to RMB 15,200-15,500/mt, with spot discounts between RMB 120-150/mt.

Although China declared to lower banks’ reserve requirement ratio starting May 18, market concerns remained. SHFE lead prices opened at RMB 15,700/mt Monday and edged up after hitting a low of RMB 15,400/mt. At midday, SHFE lead prices moved around RMB 15,600/mt but fell in the afternoon due to the declines in domestic stocks and LME lead prices, to finally close at RMB 15,530/mt, down RMB 70/mt. Trading volumes were up 114 lots to 378 lots, and positions increased by 42 lots to 1,034 lots.

On Monday, SHFE lead prices kept falling after opening and moved around RMB 15,600/mt. In China’s domestic spot markets, trading was light on bearish outlook. Quotations for well-known brands such as Chihong Zn & Ge, Chengyuan, and Nanfang were mainly between RMB 15,530-15,560/mt, with discounts of RMB 40-60/mt over the most active SHFE lead contract price. Brands from Gejiu region were quoted around RMB 15,380/mt.

Given the soft consumption in lead-acid battery market, the diverged opinions among market players with regard to lead price this week are mainly based on the viewpoints on macroeconomic conditions. 

13% of market players believe the report of China’s RRR cut will release liquidity against the backdrop of current slowdown in economic growth, so as to benefit the domestic stock markets and lead futures. In addition, the Michigan consumer confidence index for May hit a high since January 2008, also helping ease the bearish mood in the market. Meanwhile, LME lead inventories have fallen by 8,575 mt since May, with the proportion of canceled warrants remaining high at 23.18%. These may all help support SHFE lead prices, and there is little chance for SHFE lead prices to drop below the RMB 15,400/mt level. In China’s domestic spot market, smelters will limit sales due to low prices, with spot prices expected between RMB 15,600-15,700/mt.

87% of investors are relatively cautious, holding that the European debt issue is not likely to be resolved in the near term with leaders paying more attention to the unstable political situation in Europe. Combined with a US dollar index hovering around 80, LME lead prices will be weighed down. In spot markets, since long-term contracts take up over half of sales, smelters may limit sales if lead prices remain low on account of little financial and inventory pressure and the staying high costs. Meanwhile, lead-acid battery producers will only purchase on an as-needed basis due to weak demand. Besides, since lead from Gejiu region was quoted as low as RMB 15,400/mt, prices for branded lead may not increase sharply. Thus, lead prices are expected to be between RMB 15,450-15,600/mt this week.

On Monday, trading in Shanghai tin market remained modest. Nanshan, Jinlong and Yunxiang were mainly traded at RMB 157,000/mt, with a few transactions finally concluded at RMB 156,500/mt. Mainstream traded prices for Yunheng and Yunxi were between RMB 157,000-160,000/mt. Dealers were still very cautious and limited replenishments as the weak LME tin prices continued to influence the market. Buying interest at downstream enterprises remained low. Investors were not optimistic to market outlook and only watched on the sidelines.

As for the price trends in tin market this week, 70% of market players note prices may remain flat. LME tin prices ended at USD 20,376/mt last Friday, with losses narrowed to USD 4/mt from the previous trading day, helping support spot market somewhat. However, buying willingness at enterprises downstream did not improve, and wait-and-see sentiment prevailed in the market. In this circumstance, spot tin prices may test RMB 155,000/mt if LME tin prices continue to fall.

The remaining 30% investors believe tin prices will drop below RMB 155,000/mt this week, saying that production at enterprises downstream is negatively affected by China’s economic slowdown, causing these enterprises to limit purchases for raw materials. As such, demand downstream is not likely increase, and in turn, dragging tin prices to fall below RMB 155,000/mt.

In the Shanghai nickel market, spot prices staged sharp losses along with tumbling LME nickel prices on Monday. Mainstream traded prices for Jinchuan nickel slid to RMB 129,000-129,200/mt, and RMB 126,800-127,000/mt for Russian nickel. Market pessimism allowed downstream producers to stay away from the market, and traders were also wary of purchases. Hence, market trading was light.

According to a recent SMM survey of price movements this week, 60% market players expect nickel prices to drop. This week, the debt-ridden countries in the euro zone will face the first round of bonds auctions after elections in France, Greece and some cities in Italy. The election results show that parties who favored austerity measures in the election all failed to win the election. Markets are now concerned over the results of bonds auction sales. Nickel and other metals will come under great downward pressures if more negative news comes from the Europe. Besides, the failure to create a coalition government in Greece has added to the possibility that Greece may exit from the euro zone. In this context, the dollar will remain strong, and so base metals and other commodities will face heavy downward pressures, and may hit a new low for the year.

30% market participants expect LME nickel prices to keep fluctuating this week. Those people believe that sluggish nickel prices are due largely to weak demand in China. The cut of reserve requirement ratio by China’s central bank is expected to help domestic economy to rebound, supporting market sentiment. As LME nickel prices have dropped to a low level, any downward room will be limited. Hence, LME nickel prices should continue to fluctuate this week.

The rest 10% players understand that LME nickel prices will rebound this week, along with the absorption of negative news and support from low buying activities.

base metals
copper Cu
Al aluminum
Zn zinc
Pb lead
Ni nickel

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