SMM Daily Review – 2012/5/21 Base Metals Market

SHANGHAI, May 22 (SMM) –

Copper
As LME copper steadied last Friday, the most active SHFE 1209 copper contract opened RMB 610/mt higher at RMB 55,680/mt Monday. The US dollar fell during the day, so LME copper stabilized above USD 7,700/mt. Coupled with slightly increasing Chinese stock markets, the contract continued to rebound after breaking resistance at the RMB 56,000/mt mark, climbing to as high as RMB 56,130/mt in the afternoon. However, as new shorts entered markets at the tail of trading, SHFE 1209 copper contract pared daily gains but still ended RMB 820/mt or 1.49% higher at RMB 55,890/mt finally, with positions and trading volumes decreasing by 1,612 lots and 176,000 lots, respectively. Positions and trading volumes for all SHFE copper contracts fell by 20,410 lots and 346,000 lots, respectively. Shorts generally closed positions during the whole trading day, while longs were still wary of operations. SMM sees limited rebound room for the foreseeable future.

SHFE copper prices rebounded by more than 1.5%, and the SHFE/LME copper price ratio improved significantly to 7.25 , cutting losses in imported copper. Spot copper supply increased slightly in consequence. But cargo-holders were optimistic about future copper premiums and thus insisted on higher premium quotes between positive RMB 200-280/mt in Shanghai in the morning business. Traded prices for standard-quality copper were between RMB 56,550-56,670/mt, and RMB 56,600-56,750/mt for high-quality copper. Downstream producers stood on the sidelines during the first trading day of the week following purchases at the lows the previous week and due to doubts about copper price rebounds. This led to limited market transaction volumes in the morning. In the afternoon, SHFE copper prices remained at the highs, so spot copper premiums fell slightly. Premium quotes for high-quality copper were between positive RMB 250-270/mt. Traded prices were little changed from the morning levels, but market activity remained lackluster.

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

Based on the survey, 56% of market insiders are optimistic, believing LME copper can rebound above USD 7,800/mt before climbing to around the 10-day moving average of USD 7,850/mt and that SHFE copper will challenge RMB 57,000/mt. Last weekend's G8 meeting held positive attitudes toward solving the European debt crisis, especially the Greek problems. Markets are optimistic that this Wednesday's European Union leaders' meeting will also yield positive results, which can calm the jittery markets and help the euro break resistance at 1.2950. Once risk aversion wanes, the US dollar will meet resistance to move higher further following continuous gains, and its pressures to copper prices will weaken. Technical indicators for both LME and SHFE copper are pointing upside at present. Furthermore, according to sources, there are signs domestic supervisors are stepping up efforts in allowing long-term capital to enter markets, and a plan on operation of pension fund investment will be issued soon. This means about RMB 580 billion capital may enter into markets. Coupled with the increasing Chinese stock markets, SHFE copper prices will be strongly lifted. In spot markets, spot copper premiums have recently remained high, heightening market optimism toward future premiums. Hence, these insiders expect copper prices will increase this week.   

23% of insiders are pessimistic about the outlook. LME copper prices will slide to around USD 7,600/mt, while SHFE copper prices will retreat to RMB 55,000/mt. First, long investor activity in London is abating, and spot copper premiums there have also fallen sharply. The proportion of canceled warrants to total LME copper stocks fell to 16% as of last Friday. Domestic copper consumption fails to improve, while cargo-holders of imported copper become more willing to sell given corrections in the SHFE/LME copper price ratio, imposing pressures to copper prices. In addition, China will announce the latest HSBC PMI data this week, and markets anticipate the data to remain below the 50 mark. As such, these insiders expect copper prices to slide this week.

The remaining 31% of market insiders hold the view copper prices will continue to be mired at current levels, with LME copper prices estimated between USD 7,650-7,750/mt and SHFE copper prices between RMB 55,500-56,500/mt. Negative factors prevail, including a lack of substantive solution to the euro zone debt woes and the Greek issues, as well as downgrades of credit ratings to European banks by credit rating agencies. Markets are negative toward the US economic figures this week, including housing starts, existing home sales, and durable goods orders. Longs were still wary of operations when copper prices rebounded Monday. Even if copper prices need technical corrections following considerable drops, any rebound will be limited. Therefore, these insiders believe that copper prices will mainly fluctuate at current values this week.

Aluminum
The most active SHFE aluminum contract for August delivery opened higher at RMB 16,045/mt and settled up RMB 100/mt or 0.62% at RMB 16,125/mt, as shorts chose to take profits. Positions dropped 2,774 lots to 88,028 lots. The slight rebound was driven by recent gains in LME aluminum and the market sentiment should remain cautious. SMM expects the contract to test pressure at the 30-day moving average in the near term.

Spot aluminum traded at RMB 16,040-16,070/mt in Shanghai, at discounts of RMB 0-30/mt over current-month SHFE aluminum prices. The trading band in Wuxi is RMB 16,060-16,080/mt and is RMB 16,050-16,070/mt in Hangzhou. The wait-and-see sentiment was strong at downstream buyers despite higher SHFE aluminum prices. Quotations varied with ingot qualities. The overall traded volume was light as supply was sufficient.

An SMM survey on this week's aluminum prices covered 35 traders, among which 12 expect gains, 22 see little change and 1 says aluminum prices will drop.

The 12 optimistic traders draw their conclusion from gains in SHFE aluminum even though other base metals shed losses. The most active SHFE aluminum contract climbed for three successive trading days and succeeded in breaking through RMB 16,125/mt. These traders also believe slight discounts of RMB 0-40/mt will be maintained during spot trading.

The 22 traders holding neutral views say the current-month SHFE aluminum contract, though rebounded while other base metals slipped, has stayed in the bottom range, and that overseas uncertainty, including Greece's exit from the euro zone and renewed worries towards high debt yields in Spain, will continue to push up the US dollar, which will in turn weigh on LME aluminum and SHFE aluminum. The current-month SHFE aluminum contract also felt strong resistance at the 30-day moving average and more struggles therefore are expected at the 16,100/mt mark. Supply cuts by large producers when prices drop, on the other hand, will prevent heavy losses in the light metal.

The only pessimistic trader thinks that the recent rebound in aluminum prices is temporary and pressure from Europe will drag down the light metal. In addition, according to the trader, spot aluminum demand still lacks clears signs of improvement in the peak-demand period and increasing supply will prevent gains. The trader expects spot aluminum to drop below RMB 16,000/mt this week.

Lead
Since the G8 summit has eased market concerns and boosted market confidence to certain degree, SHFE lead prices stopped falling and rallied Monday. LME lead prices opened at RMB 15,195/mt in the morning and moved up since midday influenced by rising domestic stocks, but met strong resistance at the 5-day moving average to finally close at RMB 15,250/mt, up RMB 175/mt or 1.16%. Trading volumes were down 500 lots to 204 lots, while positions were up 68 lots to 1,518 lots.

SHFE lead prices stabilized on Monday. In domestic spot markets, most dealers were not willing to move goods on bullish outlook. Chihong Zn & Ge was initially quoted around RMB 15,250/mt and later climbed to RMB 15,300/mt due to the rising SHFE lead prices. Shuangyan was quoted at RMB 15,240/mt. Offers for lead from Gejiu region were at RMB 15,220/mt. Both sellers and buyers were not actively entering market.

An SMM survey concerning to lead price trends shows that 33% market players are optimistic and believe lead prices should rally mildly this week. The G8 leaders expressed their hopes for Greece to stay in the euro zone and urged the vital role of a powerful and unified euro zone in global economic recovery and stability, offering favorable news to the market. Meanwhile, the US dollar index fell to 81 from a high of 81.76. With respect to market fundamentals, buyers will be more willing to purchase due to bullish outlook with declines in lead prices arrested, and demand in China's domestic market is expected to improve, hopefully buoying lead prices to certain degree. Besides, spot lead prices will likely edge up slightly following the sharp decrease last week. Thus, spot prices should move between RMB 15,300-15,450/mt.

The remaining 67% investors were relatively conservative, noting that whether Greece will stay in the euro zone remains a doubt given the uncertainties in the euro zone. On the other hand, the remaining sluggish demand downstream will not be able to drive up lead prices. Smelters are not willing to sell due to low prices, leaving both sellers and buyers less active in trading. In this context, spot prices should mainly move between RMB 15,200-15,300/mt this week.

Zinc
The G-8 leaders last Saturday stressed that Greece should remain in the euro zone, and to comply with its commitment is essential. Supported by the news, SHFE three-month zinc contract prices opened slightly higher at RMB 14,930/mt on Monday, and ended at RMB 14,990/mt after hovering around the RMB 15,000/mt mark for the whole day, up RMB 120/mt or 0.81%. Trading volumes were down 21,414 lots to 95,034 lots, and positions were down 4,938 lots to 161,022 lots. 

In the domestic spot market, spot discounts of 0# zinc were RMB 80/mt over SHFE three-month zinc contract, with deals concluded between RMB 14,900-14,930/mt, and quotations for #1 were between RMB 14,850-14,900/mt, but with limited deals. Downstream producers chose to stand on the sidelines, as they doubted SHFE three-month zinc prices will rise above RMB 15,000/mt. 

With unstable Greece's political situation, the euro continued to surge. Both LME and SHFE zinc prices hit new lows for the year.

About 60% of market players believe SHFE three-month zinc contract prices will rise to RMB 15,200/mt this week. At the G8 summit taking place last weekend, the governments are decided to keep Greece in the euro zone, causing market confidence to improve. The US dollar index is expected to fall from 81, and LME zinc prices should rally to USD 1,920-1,950/mt. goods supply available in the market is tight recently, while spot discounts remained low. On the other hand, many smelters plan to conduct maintenance in May or June, with spot output expected to fall further, giving support to zinc prices. SHFE three-month zinc contract prices should rally to RMB 15,000-15,300/mt this week, with spot discounts between RMB 100-120/mt.

40% believe zinc prices should stop falling but barely rebound. Despite the G8 summit hopes to keep Greece in the euro zone, massive funds will be needed to help Greece. On the other hand, slow economic recovery in the euro zone kept its consumption ability weak, with LME zinc inventories 840,000 mt. In this context, LME zinc prices should move between USD 1,890-1,920/mt. Despite Premier Wen Jiabao emphasized pre-adjustment and growth stability, relative measures will not affect downstream industries in the short term. Downstream purchasing did not improve in 2Q, while the seasonal low demand period nears. Besides, zinc imported previously by arbitrager will arrive in June and July. In this context, SHFE three-month zinc contract prices should move between RMB 14,800-15,000/mt, with spot discounts between RMB 80-100/mt.

Tin
In Shanghai tin market, mainstream traded prices were between RMB 153,000-155,000/mt on Monday with market confidence boosted by the stabilized LME tin prices. Nanshan, Jinlong, Yunxiang, and Yunshan were mainly traded between RMB 153,000-154,000/mt, while most transactions for Yunxi were concluded between RMB 154,000-155,000/mt. Smelters were not willing to sell goods due to the staying high costs and unsuitable tin prices. Meanwhile, buying interest downstream improved, promoting transactions, and low-price goods were rarely seen. However, some market players still held a wait-and-see attitude as market was unstable.

With regard to price trends, 40% market players believe tin prices should rally this week. On one hand, the LME tin prices closed higher last Friday, raising market confidence. On the other, since smelters are reluctant to move goods due to high costs, goods circulating in the market were limited, giving certain support to tin prices. Thus, domestic tin prices should rise mildly if LME tin prices continue the upward trend.

40% investors hold a view that the tin prices tend to stabilize this week. Despite a sign of stabilizing in LME tin prices, the macroeconomic condition is still full of uncertainties given the unresolved European debt crisis, and wait-and-see still prevails in domestic market due to the remaining sluggish demand which leads to modest transactions. In this context, domestic tin prices are not likely to gain strong support and should remain stable if the increases in LME tin prices are limited.

The remaining 20% market players believe tin prices will fall this week, since orders at enterprises downstream failed to stage any remarkable improvements, and LME tin prices have not fully stabilized yet.

Nickel
In the Shanghai nickel market, mainstream traded prices of Jinchuan nickel in the morning business were between RMB 126,800-127,200/mt, and RMB 124,700-124,900/mt for Russian nickel. During the afternoon business, the rising LME nickel prices helped push quotations for Jinchuan nickel up to RMB 127,200-127,500/mt, and Russian nickel up to RMB 124,900-125,000/mt. LME nickel price gains and the release of positive news reduced traders' willingness to move goods, leading to low market transactions.

According to the latest SMM survey, approximately 40% market players expect nickel prices to drop further this week due to the following factors. First, no progress has been reported for Greek issues, and debt issues in Spain and Italy urgently need to be resolved. Second, the US dollar index last Friday climbed to a high of 2012, which will cap nickel price rallies. Third, domestic demand remains weak, giving no support for higher prices.

Around 40% of market players believe, however, nickel prices will experience fluctuations this week. The message from G8 Summit boosted market sentiment, and if more positive news comes from the euro-zone leader meeting to be held this Wednesday, market confidence will be supported. This will open a room for LME nickel prices to rebound, but markets will remain cautions before the meeting. 

The rest 20% are optimistic towards prices this week. They believe the US dollar will drop due to overbought, and on Monday, the index did fall back. A weak US dollar index will support LME nickel prices. Besides, the positive news from G-8 meeting has boosted market sentiment, with a sign of upward momentum technically. Hence, the optimists expect LME nickel prices to rally between USD 17,000-17,200/mt.