SHANGHAI, Jun. 4 (SMM) – Last week, the deteriorating euro zone debt issue, the higher possibility Greece exit the euro zone, and the surging bond yields and rating downgrade of Spain triggered risk aversion in the market. This cause investors to sell commodities and to seek to US dollar for haven, driving the US dollar index to a new yearly high. SMMI were down 0.57% last week led by SMMI.Ni which slumped as much as 2.15%, followed by SMMI.Cu, falling by 0.76%. Notably, SMMI.Zn, which suffered the largest losses during May 21-25, showed resistance to declines last week, and gained 0.68%.
Copper futures prices on the SHFE also fell last week to a new low for the year of RMB 54,280/mt, down from RMB 56,300/mt. Rumors were spreading in domestic markets that the National Development and Reform Commission (NDRC) will step up the pace of new project approval, also heightening market speculation China may introduce another round of stimulus policies to boost the economy. In response, Chinese stock markets rose by nearly 2%, helping SHFE copper hold at RMB 54,000/mt, and helping the SHFE/LME copper price ratio advance to around 7.3. Nevertheless, both longs and shorts remained cautious as May ended and June began. Both positions and trading volumes contracted, with the latter decreasing by nearly 20% as of May 31st when compared to the previous week.
In spot markets last week, cargo-holders became more willing to sell at the month’s end. The improved SHFE/LME copper price ratio also helped boost copper imports, leaving spot copper supply sufficient as a result. Spot copper supply was diversified, and spot copper premiums held stable between RMB 150-220/mt. Speculators with enough cash chose to buy when copper premiums fell, while downstream producers with orders also bought at lows and only enough to maintain production. However, overall market transactions were still modest at the month’s end.
SMM expects SHFE copper prices will test RMB 54,000/mt before falling further in the coming week.
Due to falling LME aluminum prices, the most active SHFE aluminum contract for September delivery lost support at RMB 16,000/mt, but only dropped to RMB 15,925/mt as strong support was found at RMB 15,900/mt. Daily transacted contracts held near 10,000 lots. The contract showed a lack of rebound momentum, with heavy pressure at RMB 16,000/mt. The SHFE/LME aluminum price ratio has recently climbed above 7.9, but high CIF premiums have limited import profits and therefore imports of aluminum.
Sluggishness in the global economy and spot aluminum consumption added to market bearishness. That, combined with tightening cash flows at the month’s end, led to extremely light trading in the spot market. Goods holders’ selling interests split. Aluminum smelters and large traders cut supply when prices were low and even quoted with slight premiums. Medium- to small-sized traders, due to tight cash flows, liquidated at lower prices. Downstream buying remained quite weak though, with most buyers standing on the sidelines and a few purchasing as-needed. Overall deals were quite limited.
Last week, SHFE lead prices, influenced by LME lead prices and Chinese stock markets, fell from RMB 15,300/mt early last week to RMB 14,900/mt, but later gained support at RMB 15,000/mt. SHFE lead prices are expected to be between RMB 15,000-15,260/mt this week.
In China’s domestic spot markets, lead prices were relatively resilient despite continuous declines in SHFE lead prices. Prices for branded lead remained between RMB 15,150-15,250/mt, with premiums over the most active SHFE lead contract price expanding to RMB 120/mt from RMB 50/mt. Prices for Hengchang and brands from the Gejiu region remained relatively low between RMB 15,000-15,100/mt. Smelters were not willing to sell due to low profits, while some downstream enterprises continued to purchase based solely on orders, keeping transactions modest. With financial pressures easing at the start of a new month, smelters in domestic spot markets will be reluctant to move goods if lead prices continue to fall. Downstream enterprises should continue to purchase as needed, and a rebound in transactions is not expected in the near-term, with traded prices expected between RMB 15,050-15,250/mt.
Last week, SHFE three-month zinc contract prices generally fluctuated below RMB 15,000/mt during the first two days in the week, but broke through RMB 15,000/mt level late Tuesday due to a rising Shanghai Composite Index. However, since the Shanghai Composite Index fluctuated weakly on Wednesday, SHFE three-month zinc contract prices fell below the 5-day and 10-day moving averages. On Thursday, dragged down by overnight LME zinc prices, SHFE three-month zinc contract prices opened lower and dipped to RMB 14,700/mt, closing at RMB 14,795/mt.
In domestic spot markets, spot zinc prices were more resistant to declines. As SHFE zinc prices fell, spot discounts narrowed from RMB 150/mt early in the week to RMB 80/mt, with spot prices between RMB 14,700-14,850/mt. As zinc prices remained sluggish, smelters turned pessimistic and continued to hold goods. Downstream buyers were cautious, with goods supply coming mainly from traders. Overall transactions were quiet.
Last week, domestic zinc inventories were down slightly compared to the previous week. Inventories in East China fell by 9,000 mt, to 464,400 mt. Zinc prices rebounded slightly, but smelters were still unwilling to sell goods, causing zinc ingot inventories in East China to fall. Spot transactions in Tianjin were also quiet, with inventories falling by 3,000 mt, to 10,000 mt. Inventories in South China grew by 1,300 mt, to 94,000, and zinc ingot in Guangdong was traded at prices higher than Shanghai, so smelters were actively moving goods.
In Shanghai tin market, mainstream traded prices were between RMB 153,500-155,000/mt as of last Friday influenced by the continuous drop of LME tin prices. Smelters limited sales due to production cuts and low selling interest, leaving fewer goods seen at low prices. But the limited supply failed to offer any support to prices. Transactions were quiet due to pessimism and wait-and-see sentiment, as well as the sluggish demand during offseason. Many smelters cut production, with a few of them even suspending operation temporarily.
By the close of last Friday, the average spot nickel price was RMB 125,120/mt, down RMB 680/mt from the previous week, but spot prices resisted declines. Downstream buyers increased purchases early in the week as prices moved lower, but traders were unwilling to sell goods. As LME nickel prices continued to fall, however, most downstream producers became cautious and took a wait-and-see attitude. Russia raised export taxes by 16.2%, effective June 5th 2012. Traders did not response strongly to the news, believing prices will depend more on downstream demand.