SMM Weekly Review and Forecast (Jul. 9-13)

SHANGHAI, Jul. 16 (SMM) – Both China's CPI and PPI hit the lowest level in nearly two and a half years, while trade surplus hit the largest in the same month since January 2009. China's import data was also softer than expected, while GDP growth fell to 7.6% YoY in 2Q, reflecting great downside pressure for China's economy. In the face of sluggish consumption and demand, stabilizing growth should be China's major task at present. As Greek and Spanish debt issues spread, Italian credit rating suffered a downgrade while Fed's members held divergent views towards implementation of QE3 measures. Base metals market activity was relatively bearish over the past week and pushed investors to the US dollar as a safe-haven. The US dollar index thus rose to a two-year top and weighed heavily on base metals. In consequence, SMMI fell by 0.71%, with nickel leading the decline and SMMI.Ni down sharply by 3.46%. However, lead bucked the trend and rebounded given a seasonal high-demand period, with SMMI.Pb up slightly by 0.67%. Zinc exhibited more resilience compared with copper and prices remained sticky last Friday. 

Copper
China's CPI and PPI figures remained soft, while China's imports of unwrought copper and copper semis during June fell by nearly 20% MoM. In response the Shanghai Composite Index, fell by over 2.37% and below 2,200. Against this backdrop, SHFE copper prices opened lower last Monday and hovered around a 10-day moving average of RMB 55,100/mt. Later in the week, prices remained between RMB 54,800-55,500/mt, namely between the 10 and 20-day moving averages, with heavy pressure at a 60-day moving average mark of RMB 55,500/mt. As longs and shorts held increasing divergent views, total positions grew by 17,000 lots while total trading volumes fell by around 270,000 lots. The shift of the most active copper contract also began last week.

In last week's spot markets, imported copper flowed into markets again as the SHFE/LME copper price ratio rose above 7.3. Spot copper discounts thus grew although the delivery date for SHFE 1207 copper contracts neared. The price gap between imported copper and high-quality domestic copper widened, and domestic high-quality copper tried to hold premiums of RMB 100/mt but was then still heavily dampened. Traders dominated buying of spot copper and selling of copper futures contracts. Downstream enterprises remained cautious and continued to buy based on orders only, keeping overall transaction volumes modest.

In the coming week, SHFE copper will first test support at RMB 54,500/mt and then RMB 56,000/mt, which is near the 60-day moving average.

Aluminum
The possibility of a slowing Chinese economy, the ongoing European debt crisis, and diminishing expectations for QE3 in the near term pushed the US dollar index to a two-year high and weighed down base metals prices. LME aluminum struggled near USD 1,900/mt, and after dipping below this mark, previous support at this price has now been replaced by key resistance. The most actively traded aluminum contract on the Shanghai Futures Exchange also struggled near the RMB 15,500/mt mark, with pressure at the 20-day moving average gradually building. Although contract delivery dates neared, spot aluminum was trading at discounts of nearly RMB 100/mt over current-month SHFE aluminum prices, a result of cheaper imported aluminum and sluggish demand. Demand was weak even though selling interest was strong, so deals were limited. The SMM Aluminum Price fell rapidly from RMB 15,600/mt, to near RMB 15,500/mt.

Lead
Last week, SHFE lead prices fluctuated within the RMB 14,800-14,900/mt range, with support at the 20-day moving average, but resistance at the 5-day moving average. SHFE lead prices are expected to move between RMB 14,800-15,000/mt this coming week.

In China's domestic spot markets, lead prices generally remained between RMB 14,850-14,950/mt, with only a few well-known brands, such as Nanfang, trading higher between RMB 15,020-15,030/mt. Cargo holders were more willing to sell goods and downstream buying interest improved slightly with the onset of the peak-demand season for electric vehicle batteries. With spot lead prices gradually rising above RMB 15,000/mt, smelters will be encouraged to move goods and downstream buyers should be more willing to purchase since orders are expected to improve during the peak demand season. Spot lead prices are expected at RMB 14,850-15,050/mt in the coming week.

Zinc
At the close of trading last Thursday, spot nickel prices averaged RMB 119,800/mt, down RMB 1,780/mt. Jinchuan Group cut nickel ex-work prices on Monday and Wednesday by a total of RMB 5,000/mt, to RMB 119,000/mt. Transactions remained lackluster, however, and spot prices plunged, although slower than LME nickel prices. Downstream inquiries were few since steadily falling LME nickel prices turned markets cautious, with transactions mainly made among traders.

SHFE three-month zinc contract prices fluctuated narrowly, inching down from the RMB 14,800/mt level. As market hopes for more policy adjustments by China's central bank faded,  SHFE three-month zinc contract prices moved lower after large numbers of shorts sold off goods, causing prices to fall below all moving averages on Thursday.
 
In domestic spot markets, spot discounts did not narrow despite falling SHFE three-month zinc contract prices, but continued to hover between RMB 80-100/mt, and with traded prices between RMB 14,500-14,650/mt. Downstream buying interest was low and traders were unable to make arbitrage trades due to unfavorable discounts. Imported zinc was also popular, with prices close to domestic #1 zinc, which reduced demand for domestic zinc.

Tin
Last week, spot tin prices in China fell to RMB 146,500-148,500/mt from RMB 148,000-149,000/mt early in the week, and trading remained modest. Downstream purchases remained weak and tin prices kept falling. Although smelters limited supply, the support to tin prices was limited. Goods circulating in the market were mainly from Yunnan, with a few from Jiangxi. Most traders reflected poor sales with strong wait-and-see sentiment in the market.  

Nickel
At the close of trading last Thursday, spot nickel prices averaged RMB 119,800/mt, down RMB 1,780/mt. Jinchuan Group cut nickel ex-work prices on Monday and Wednesday by a total of RMB 5,000/mt, to RMB 119,000/mt. Transactions remained lackluster, however, and spot prices plunged, although slower than LME nickel prices. Downstream inquiries were few since steadily falling LME nickel prices turned markets cautious, with transactions mainly made among traders.