SHANGHAI, May 21 (SMM) –Competing political parties in Greece cannot reach consensus on the EU bailout pact and austerity measures, and failed to form a coalition government. In this context, Greece faced tight capital availability, abating bank liquidity, and an increasing risk of exiting the euro zone. Spanish and Italian bond yields soared last week, which forced Moody's to cut 26 Italian banks and ignited market worries over a global economic slow. As a result, the euro retreated to 1.2654, down nearly 2%, while the US dollar rebounded strongly to 81.71. Crude oil and gold prices also fell sharply, and commodity markets suffered aggressive sell-offs. Base metals thus gained the falling momentum over the past week, with SMMI falling by 2.29%. SMMI.Sn and SMMI.Cu took the lead in declines, sliding by 3.13% and 3.03%, respectively. Aluminum continued to exhibit resilience, with SMMI.Al only retreating by 0.16%.
China's Central Bank's cut in the Reserve Requirement Ratio (RRR) failed to boost commodity markets, with Chinese stock markets still falling by 1% and SHFE copper prices sinking from RMB 57,700/mt, to a new low for 2012 of RMB 54,390/mt. SHFE 1209 became the most active copper contract last Thursday. Trading volumes for SHFE copper contracts increased by more than 1 million lots, while positions grew by around 50,000 lots. SHFE copper prices moved away from all recent moving averages as short investors were active selling, but this helped improve the SHFE/LME copper price ratio.
In spot markets last week, spot copper premiums climbed to as high as RMB 250/mt as SHFE copper prices fell. Cargo-holders who had not hedged against copper price volatilities chose to aggressively sell, but domestic copper smelters were reluctant to sell at low prices, insisting instead on high premium quotes. High spot copper premiums restricted speculative activities. However, downstream processors with strong orders increased purchases at current low prices, increasing market activity.
In SMM's views, SHFE 1209 copper contract prices have lost support at all moving averages and may retreat to RMB 54,000/mt in the coming week. However, bargain hunting at the lows and profit-taking from short investors will likely help SHFE 1209 copper contract prices rise and test RMB 56,000/mt.
The risk of a Greek default is growing, but whether or not Greece exits the euro zone is still not certain. The European debt crisis intensified last week, inducing a sell-off of high risk assets, including base metal commodities, which helped push up the US dollar index to a high of 81 last Thursday. The high US dollar index pushed down metals prices, with LME aluminum falling to a new low for 2012 of USD 2,007.5/mt. Aluminum prices then leveled out and stabilized at USD 2,000-2,050/mt. The cut in the bank reserve requirement by the People's Bank of China provided little support for markets, with the most active SHFE August aluminum contract price falling to RMB 15,900/mt, a new low for 2012. Technical support for contract prices failed to cover the price gap as support from less than 20,000 lots of transacted contracts proved insufficient, with prices also failing to reach the 10-day moving average. Spot aluminum was more resilient, however, falling from RMB 16,030/mt to only RMB 15,975/mt as sufficient supply and weak demand limited trading.
The outlook for the euro zone is grim and investors are losing confidence, while weak support from soft Chinese demand also failed to inspire markets. The US dollar index consolidated at 81 and may move higher. Base metals are still under downward pressure, so LME aluminum is expected to test USD 2,000/mt. Prices for the most active SHFE aluminum contract for August delivery may fall given a recent weak technical rebound. Although monetary policies in China continue to ease, prices for aluminum contracts with longer delivery terms will remain weak due to pressure from outside China. The August contract price has yet to find strong support at RMB 16,000/mt, while aluminum spot prices are also unable to withstand pressure from futures losses. However, spot prices will remain relatively firm since major aluminum producers have cut supply. Support can also be found from higher raw materials costs and steady demand. In this context, the trading band for aluminum spot prices should be RMB 15,900-16,050/mt over the short term.
Last week, SHFE lead prices fell to RMB 15,255/mt, down from RMB 15,700/mt and down 2% for the week. SHFE lead prices are expected to be between RMB 15,000-15,350/mt.
China's domestic spot markets were less active early last week with spot prices hovering between RMB 15,500-15,550/mt. Smelters were selling goods normally, but prices for branded lead later fell as low as RMB 15,300-15,350/mt, causing smelters and dealers to stop selling. Despite continuous declines in lead prices, buying interest from lead-acid battery enterprises remained low due to reduced downstream orders. China's domestic spot markets may not show significant improvements this week, since smelters and dealers will be reluctant to move goods due to high costs. Downstream buyers should still purchase on an as-needed basis, leaving markets depressed.
SHFE three-month zinc contract prices were more sluggish, falling below the RMB 15,000/mt level on Monday and fluctuating between RMB 14,800-15,000/mt. On Tuesday, SHFE zinc contract prices opened low and continued to fall, hitting a new low for the year of RMB 14,840/mt. As large numbers of buyers rushed into the market, SHFE three-month zinc contract prices later rallied to RMB 15,000/mt.
In domestic spot markets, spot discounts against SHFE three-month zinc contract prices remained between RMB 40-60/mt as smelters held back goods, with prices firming between RMB 14,800-14,900/mt. Market supply was insufficient due to fewer goods delivered during the week. Some bold traders purchased zinc as prices plunged early in the week, but these goods were not released as zinc prices continued to fall. Due to the lack of arbitrage opportunities, traders were only purchasing modestly, with overall transactions muted.
Last week, spot inventories fell sharply, with the most significant declines reported in East China, where stocks fell 140,000 mt, to 466,400 mt. Inventories in South China grew by over 5,000 mt, while inventories in North China fell 3,000 mt, to 13,000 mt. Zinc prices fluctuated below RMB 15,000/mt, allowing market players to purchase at low prices. LME zinc inventories surged to 940,000 mt.
Last week, Shanghai tin market remained quiet. The continuous declines in LME tin prices depressed spot market, with spot tin prices falling to RMB 153,500-156,000/mt from the early week RMB 156,500-160,000/mt, representing the largest loss among base metals in domestic market. Transactions were modest in general, with only some dealers replenishing stocks moderately last Thursday when LME tin prices edged up briefly. Smelters were not willing to move goods due to falling tin prices, but a few smelters sold in limited amounts due to inventory pressures and needs for cash flow. Most downstream buyers still stayed out of the market with strong wait-and-see sentiments.
Last week, LME nickel prices opened at USD 17,195/mt. Rumors that Greece may leave the euro zone grew as politicians failed to form a new government ahead of the EU deadline, choosing instead to hold another round of elections in June. Italy's government bond yields rose to 6.05%, while Spain's 10-year government bond yields rose to 6.36%. On Wednesday, the US dollar index surged to 81, a 2012 record and pushed down LME nickel prices to a record low for the year of RMB 16,770/mt. LME nickel prices are expected to rebound, however, now that they have fallen close to record lows from 2010, but fell again on Thursday, to USD 17,133/mt, down another USD 62/mt.
Last Friday, the average spot nickel price was RMB 126,840/mt, down RMB 2,700/mt compared to the previous week. Jinchuan Group lowered nickel prices to RMB 126,000/mt, a cut of RMB 4,000/mt. Since the market was expecting price cuts, Jinchuan's adjustment did not significantly affect spot nickel prices. Declines in spot nickel prices were much larger than LME nickel prices, however, so traders increased purchases, causing trading volumes to increase. As a result of record low spot prices, the Shanghai/LME nickel price ratio fell and was unfavorable for imports.