SMM Daily Review - 2012/6/4 Base Metals Market

SHANGHAI, Jun. 5 (SMM) –

Copper
As LME copper tumbled last Friday, the most active SHFE copper contract for September delivery started RMB 1,350/mt lower at RMB 53,120/mt Monday. Without guidance from the LME, the contract suffered aggressive short selling and slid all the way after touching a high at RMB 53,540/mt. In the afternoon, as the Shanghai Composite Index fell by over 2.7%, the contract retreated further, down to RMB 52,330/mt, the lowest in the past ten months. However, as investors closed positions at the tail of trading, SHFE 1209 copper contract stopped falling and kept fluctuating weakly around RMB 52,700/mt, before finally ending at RMB 52,770/mt, down RMB 1,700/mt or 3.12%. Trading volumes and positions for the most active copper contract increased by 252,000 lots and 19,906 lots, respectively. Total positions for all SHFE copper contracts exceeded 46,000 lots during the day. From technical indicators, SHFE copper is facing greater systematic risks and will likely lose support at RMB 52,500/mt on Tuesday, when the LME market remains closed.

As SHFE copper prices tumbled by over 3.5%, offers for spot copper premiums rose to positive RMB 330-420/mt in Shanghai in the morning business. Traded prices for standard-quality copper were between RMB 54,250-54,400/mt, and RMB 54,300-54,450/mt for high-quality copper. Cargo-holders became more willing to move goods, causing market supply to remain sufficient. Both traders and downstream producers chose to buy at prices near RMB 54,000/mt, leading to modest market transactions in the morning. In the afternoon session, SHFE copper prices remained weak, so spot copper premiums widened further to positive RMB 350-430/mt. Traded prices touched the RMB 54,000/mt mark in the afternoon, but market transactions were smaller than the morning business levels.

SMM conducted a survey with regard copper price movement this week.

Based on the survey, 65% of the surveyed market insiders see copper prices falling. They believe LME copper will directly test USD 7,000/mt and that SHFE copper will look support at RMB 51,000/mt. The European debt crisis is escalating. Germany's bond yields fell below zero last Friday for the first time, while Spanish debt problems resurfaced and the country is likely to become the fourth euro zone country that needs bailout following Greece, Ireland, and Portugal. Besides, there is too much uncertainty ahead of the Greek election on June 17, sending Greek stock markets down to levels last seen in February 1990. Greek banking industry is also facing risks, dampening the financial market and weighing on commodity markets. PMI data out of China, the euro zone, and other countries was dismal last Friday, while the latest US nonfarm payroll also fell significantly, turning markets pessimistic about this week's economic figures including durable goods orders and initial jobless claims. Gold prices surged last Friday due to a safe-haven, but crude oil prices fell to a low at USD 81.5/bbl, down by more than 5% over just two trading days in June. Investors will still favor gold as a safe-haven this week given heightening expectations over QE3 measures, but will likely sell copper, a risky asset. According to the latest CFTC report, net short positions have already rose to 11,638 lots, up 1,540 lots from the previous day. The LME market remains closed for two trading days, and without guidance, SHFE copper fell appreciably on Monday and is likely to slide further amid growing sell-offs. The latest proportion of canceled warrants to total LME copper stocks has slipped to around 8%, while LME copper stocks rose for two consecutive days. As SHFE forward copper contracts face great selling pressures, participants in spot markets become more negative about future copper prices. Furthermore, given the increasing SHFE/LME copper price ratio, cargo-holders in spot markets continue to be eager to sell, but downstream consumption remains sluggish, which will force copper prices to sink. From technical indictors, both LME and SHFE copper are on a downside track. Chinese stock markets tumbled during the first trading day of this week, registering the biggest decline so far this year, and will probably lose 2,300. As such, these market insiders expect copper prices to drop this week.     

31% of market insiders anticipate little changes in copper prices, believing LME copper will fluctuate between USD 7,250-7,400/mt and SHFE copper between RMB 52,500-53,500/mt. Although investor speculation over QE3 measures is increasing, the US dollar index will hover at the highs around 83 this week. As SHFE copper prices fall, cargo-holders in spot markets insist on high copper premiums, although they are eager to sell for cash. Downstream producers also opted to buy at prices around RMB 54,000/mt, which can support copper prices. Hence, these insiders believe copper prices will continue to lurch around current values this week.

The remaining 4% of insiders are optimistic about the outlook, expecting LME copper can rally above USD 7,400/mt and that SHFE copper can increase to around RMB 54,000/mt. Despite many unfavorable factors, all countries are adopting some stimulative measures to improve current situation. In China, the falling PMI data and Chinese stock markets have raised market anticipation that China's central bank will introduce some easy measures very soon. This can help copper prices gain rising momentum.

Aluminum
Following the plunge of LME aluminum prices last Friday, the most active SHFE September aluminum contract gapped lower at RMB 15,850/mt and ended down RMB 85/mt or 0.53% at RMB 15,865/mt on Monday. It slipped to RMB 15,800/mt in the beginning, but recovered some losses with the help of bargain hunting. Positions added 2,048 lots to 102,322 lots. LME was closed and SHFE aluminum tracked other futures and Chinese stocks. Though it showed more stability than other base metals contracts, SMM expects it to test support at RMB 15,800/mt in the near term in the face of short selling triggered by a sluggish macro economy and accelerating losses in copper prices.

Shanghai mainstream spot prices were RMB 15,890-15,910/mt. Domestic stocks and futures prices fell, despite resilience of SHFE aluminum, the macroeconomic situation downturn turned aluminum market bearishness strong. Shanghai goods holders retained strong selling interest, dragging spot aluminum below RMB 15,900/mt. The Wuxi market also saw strong selling interest, but Hangzhou traders were reluctant to sell when prices dropped. However, downstream aluminum processing enterprises hardly purchased even at low prices. Overall deals were thin.

This week SMM surveyed 25 aluminum production and trade enterprises. Last week in Shanghai, spot aluminum was sold at an average RMB 15,970/mt. For this week’s aluminum price expectations, 10 see flatness, 15 see losses. This week has no bullish enterprise, highlighting pessimistic sentiment from traders. On Monday, both aluminum futures and spot edged lower, shadowing next four days of the week.

This week 10, or 40% respondents see flatness. They said spot aluminum price still has short-term support, including cost support. Starting from last Friday, Chalco lifted its alumina ex-works price to RMB 2,900/mt, while announcing its 3 alumina factories will cut 1.7 million mt/yr in capacity to support alumina prices. In early May, Indonesia raised bauxite tariff 20%, leading to increases in imported alumina prices, which will lead to higher aluminum prices. On the other hand, China successively adjusted and introduced looser industry policies, newly approved projects are coming online soon, which will stimulate consumption of aluminum ingot, so as to support aluminum prices, making it difficult to drop again. In addition, domestic aluminum businesses, such as large aluminum production and trade enterprise, will choose to collectively hold goods at lower prices, it can also prevent spot prices from falling further. The 10 respondents said aluminum prices can be maintained at RMB 15,900-16,000/mt.

This week 15, or 60% respondents are pessimistic. They said due to debt crisis in countries like Greece and the Spain, euro zone economic outlook still does not show any signs of optimism. In addition, May euro zone Manufacturing PMI data dropped again and remained below the balance line, revealing the real economy won’t be able to provide sufficient support for metals demand. United States May non-agricultural employment data were much below expectations, slowing down the US dollar surge, even so, the index still struggled high near 83. Although QE3 expectations were mentioned, that won’t provide immediate support. For the short-term, the index still has high possibilities to stay high, thereby continuing to pressure LME aluminum prices to USD 1,972/mt, the 5-month low. This trend temporarily still has no weakening signs. LME aluminum prices fell quickly last Friday, triggering losses in domestic aluminum prices. The most active SHFE aluminum contract gapped lower and struggled at RMB 15,800/mt. The current-month contract also gapped lower, and managed to stabilize at RMB 15,890/mt.

For aluminum spot, its discounts over the current-month contract continued to weaken to RMB 10/mt. This indicated that spot aluminum was relatively stable compared with other metals and futures, but downstream consumption still was weak. Though traders were open to deals even at lower prices, downstream procurements still have not seen clear signs of improvement. SMM statistics reveal that domestic spot inventories saw a much slower falling pace, also proved the fact of slowing downstream consumption. For recent domestic stimulus and looser monetary policies, these traders said orders dipped and that is the core cause of recent declines in aluminum consumption. Above taken together, in the face of weak consumption and negative messages from overseas, spot aluminum prices can hardly find support and its overall trading range may slip below RMB 15,900/mt.

Lead
On Monday, SHFE lead prices opened RMB 80/mt lower at RMB 15,000/mt due to disappointing economic data released last Friday. Since LME was closed for holiday, SHFE lead prices were largely influenced by domestic stocks. In the afternoon, SHFE lead prices fluctuated down to hit a low of RMB 14,880/mt and finally closed at RMB 14,885/mt, down RMB 195/mt, or 1.29%. Trading volumes increased by 62 lots to 196 lots, while positions were up 10 lots to 2,130 lots.

In China’s domestic spot market, spot lead prices edged down, quotations Nanfang were at RMB 15,080/mt, with premiums of RMB 120/mt over the most active SHFE lead price. Shenqian and lead from Gejiu region were quoted between RMB 14,980-15,000/mt, while Hengchang was offered at RMB 14,900/mt. Transactions were limited with enterprises downstream remaining cautious.

According to SMM’s survey to 30 enterprises, most market players were pessimistic, with 73% of them believing lead prices will continue to fall and will likely dip to a low of RMB 14,800/mt this coming week. Since PMI figures of China, the euro zone and Germany were all lower than expected in May, and since the much-concerned US employment data for May was reported disappointing, US equities and crude oil prices both slumped, arousing market fears. The proportion of canceled warrants on LME fell below 20%. With uncertainty remained in the short term, most enterprises downstream will hold cautious and will limit purchases given the poor orders.

The remaining 27% market players believed lead prices will hover around RMB 15,000/mt. The intensified European debt crisis and bleak European economy leaves market confidence close to collapse. However, as LME will be closed for holiday during the first two days this coming week, SHFE lead prices will be more sensitive to domestic stocks and are likely to be resilient. With regard to market fundamentals, LME lead inventories continued to decline, but downstream demand in spot market should remain unimproved. Smelters will be more reluctant to move goods with financial pressures easing at early month, leaving both supply and demand in sluggishness.

Zinc
On Monday, SHFE zinc market moved along with domestic stocks market, as LME market was closed for Spring Bank holiday. After opening low at RMB 14,665/mt, SHFE three-month zinc contract prices fluctuated narrowly, and dived at the midday as stocks market slumped, dipping to a new low of RMB 14,470/mt. Supported by buying activities at lows, SHFE three-month zinc contract prices rallied, but any rising momentum was limited. Finally, SHFE three-month zinc contract prices finished at RMB 14,550/mt, down RMB 250/mt, or a drop of 1.69% from a day ago. Trading volumes were up more than 80,000 lots to 188,344 lots, and positions were up 6,236 lots to 182,186 lots, dominated by the shorts.

In the spot market, spot discounts of #0 zinc were RMB 50 against SHFE 1209 zinc prices, the most actively-traded contract, with deals between RMB 14,600-14,620/mt. Prices of #1 zinc ranged between RMB 14,560-14,590/mt. After hitting a new low this year at the midday, spot discounts of #0 against SHFE three-month zinc prices narrowed to RMB 10/mt, and traded prices were between RMB 14,560-14,590/mt. Limited deals were made for #1 zinc, with prices unchanged. Domestic zinc smelters were reluctant to move goods on Monday, but narrowed spot discounts opened room for hedged goods. Middlemen and downstream producers went bargain hunting, helping improve market transactions.

Eurozone PMI released last Friday was disappointing, while US non-farm employment data was also much lower than expected. As a result, LME zinc prices hit a new low last Friday, dragging down SHFE zinc prices to open low and move lower, hitting a fresh low for the year in the midday.

The latest SMM survey shows that 70% market participants believe SHFE 1209 zinc contract prices should fall further to RMB 14,200/mt this week. Negative news from major economies last week shows slow recovery, and HSBC released China’s PMI was below 50, while European PMI and US non-farm employment data were low, and unemployment rate remained high. On the other hand, European debt crisis is still the focus of markets. With the exception of Greece, Spain’s government bond yields surged. Although LME market is closed on Monday and Tuesday, the US dollar index remains moving above the 5-day moving average. LME zinc prices should fall to USD 1,820-1,840/mt upon reopening. In domestic markets, despite smelters are holding goods, imported goods will surge into domestic spot markets in June and July due to the high SHFE/LME zinc price ratio, weighing down zinc prices. As such, SHFE 1209 zinc contract prices should move between RMB 14,200-14,500/mt, with spot prices close to ore RMB 10/mt below SHFE 1209 zinc contract prices.
 
20% market players believe SHFE zinc prices should not fall sharply. As negative news was released last week, LME zinc prices should fluctuate between USD 1,840-1,860/mt. Domestic smelters are holding goods due to falling zinc prices, so goods available are limited, causing buyers to enter the market. Besides, as the SHFE/LME copper price ratio narrowed, investors should buy zinc futures contracts whilst sell copper futures contracts, giving support to zinc prices. In this context, SHFE 1209 zinc contract prices should fluctuate weakly between RMB 14,500-14,600/mt, with discounts between RMB 10-40/mt.
 
The remaining 10% believe zinc prices should rebound. The rebounding LME zinc prices last Friday showed large numbers of buyers. LME zinc prices are expected to rally to USD 1,860-1,880/mt. Approvals of domestic projects should boost demand, with stimulus policies expected to support zinc prices. Besides, May CPI will likely continue to fall, so China might lower deposit reserve ratio. In domestic spot markets, prices are mixed across regions. Prices in Tianjin are higher than Shanghai due to limited supply, causing some spot goods in Shanghai to flow back to Tianjin and Guangdong. As such, SHFE 1209 zinc contract prices should move between RMB 14,600-14,700/mt, with discounts expanding between RMB 50-80/mt.  

Tin
On Monday, mainstream traded prices in Shanghai tin market were between RMB 152,500-154,500/mt, transactions remained modest. Jinlong, Yunxiang, Yunshan, and Yunheng were mainly traded between RMB 152,500-153,000/mt, while most transactions for Yunxi were concluded between RMB 153,000-154,500/mt. LME tin prices ended at USD 19,350/mt last Friday, combined with the remaining weak demand in domestic market, market confidence were depressed severely, causing tin prices continue to drop. At midday, some goods quoted at RMB 152,000/mt attracted dealers to replenish stocks, promoting trading slightly. However, market was quiet again with fewer low price goods circulating in the market.

With regard to the tin price this week, 70% market players believe tin prices will continue to fall and gain support at RMB 150,000/mt. The exacerbating European debt issue, the lower-than-expected US employment data and disappointing Chinese PMI added to market fears. The negative economic conditions weighed on LME tin prices further. Thus, tin prices in domestic spot market are expected to continue the downtrend but find support at the RMB 150,000/mt mark. However, a few investors believe chances are that tin prices may dropped below the mark, due mainly to the gloomy demand and weak LME tin prices.

30% market players believe tin prices should remain stable this week. Despite the continuous decline in LME tin prices, some domestic smelters cut production due to limited sales and high costs for raw materials, leaving fewer goods circulating in the market, and helping support prices in spot market.

Nickel
LME nickel market last Friday opened at USD 16,385/mt, with the highest and lowest level of USD 16,400/mt and USD 16,020/mt, respectively. Finally, LME nickel market closed at USD 16,075/mt, down USD 283/mt from a day earlier.  LME market was closed on Monday due to the Spring Bank holiday. 

On Monday, Jinchuan Group cut ex-works prices for refined nickel to RMB 122,000/mt (large panel), and RMB 123,200/mt (small in barrel), down RMB 4,000/mt.  In the Shanghai nickel market, mainstream quotations of Jinchuan nickel before price cuts were between RMB 122,000/mt, and RMB 119,500-120,000/mt for Russian nickel. After price cuts, mainstream traded prices for Jinchuan nickel were down to RMB 121,800-122,200/mt, and Russian nickel down to RMB 119,000-119,500/mt. Due to the lack of market direction, downstream producers were wary of purchases, leading to quiet trading.

According to the latest SMM survey, approximately 60% market players expect nickel prices to drop further this week. The PMI for May in China, Germany, and euro zone was all below market expectations, and meanwhile the April employment data in the euro zone was also disappointing. Moreover, the US non-farm payrolls added by 69,000 in May, far below market estimations of 150,000, and the unemployment rate rose from 8.1% to 8.2%. All these weighed down nickel and other metals prices. In marked contrast, gold prices soared by 4%, highlighting the strong market risk aversion sentiment. In addition, higher LME nickel inventories, unfavorable technical trends, as well as the sluggish stainless steel markets all have added to market pessimism.

The rest 40% believe nickel prices will stop falling this week. Some market players believe that the European Central Bank (ECB) may cut interest rate during the meeting this Wednesday. If ECB takes no action, investors will shift the focus into latest forecast on economy and inflation. This Thursday, the US Federal Reserve Chairman may be asked about whether or not twisted operations will be extended or QE3 in his testimony. These market players believe that price movements this week will be dominated by the news from the ECB and US Federal Reserve.  Nickel prices should stabilize before these events.