SMM Daily Review – 2012/7/16 Copper Market

SHANGHAI, Jul. 17 (SMM) – As LME copper surged considerably overnight, SHFE 1210 copper contract, the most active one, started RMB 410/mt higher at RMB 55,880/mt Monday. After the opening, the contract drifted higher to RMB 56,000/mt amid position closings by shorts, with a low at merely RMB 55,820/mt, but was pressured at levels above RMB 56,000/mt as longs were wary of entering markets, and since the Shanghai Composite Index gave up the previous three days' gains and touched a recent low. SHFE copper prices touched an intraday high at RMB 56,260/mt in the afternoon. Finally, SHFE 1210 copper contract ended RMB 700/mt or 1.26% higher at RMB 56,170/mt, with trading volumes and positions decreasing by 61,066 lots and 17,020 lots, respectively. Total trading volumes and positions for all SHFE copper contracts fell by 3,894 lots and 23,858 lots, respectively, while the turnover rate exceeded 100% for the most active copper contract. Buying increased for forward SHFE copper contracts, so SHFE copper prices stood above their 60-day moving average, posting better performance than LME copper.
  
As SHFE copper prices started higher, spot copper premium quotes slipped to discounts of negative RMB 50/mt and premiums of positive RMB 30/mt in Shanghai in the morning business. Traded prices for standard-quality copper were between RMB 56,000-56,090/mt, and RMB 56,050-56,150/mt for high-quality copper. There was nearly no price gap among SHFE copper contracts and allowed little speculative room, restricting both spot copper premiums and discounts. Most downstream producers thus stuck to the sidelines, awaiting clear copper price trends. As copper prices retreated to levels near RMB 56,000/mt near the midday, cargo-holders of high-quality copper reduced sale volumes. Monday was the last trading day for SHFE 1207 copper contract, and downstream producers were cautious at prices above RMB 56,000/mt, leading to modest market transactions in the morning. In the afternoon, as SHFE 1207 copper contract fell slightly, cargo-holders raised spot copper premium quotes, near those for SHFE 1208 copper contract, while mainstream spot copper offers were between discounts of negative RMB 30/mt and premiums of positive RMB 60/mt. Traded prices in the afternoon were little changed from the morning levels, but actual market transactions were limited.  

With regard to copper price trend this week, SMM conducted a survey.

Based on the survey, 32% of market insiders are positive toward the outlook, believing LME copper will rise to USD 7,800/mt and that SHFE copper may test RMB 57,000/mt. The US this week will release the latest housing starts and existing home sales, which are expected by markets to improve further and therefore alleviate market risk aversion. In this context, US equity markets will also extend rebounds after breaking resistance at all moving averages. Crude oil prices are still holding above all moving averages following declines several times, which spells commodity markets will show more resilience. From the copper fundamentals side, the proportion of cancelled warrants to total LME copper stocks rose to 20.98% as of last Friday, as spot copper premium quotes in London widened to USD 10/mt from USD 1-2/mt. LME copper stocks have also decreased recently, which will help prop up copper prices. Hence, these optimists expect copper prices to move higher this week.

52% of market insiders hold the view that copper prices will continue to fluctuate this week, with LME copper expected between USD 7,600-7,700/mt and SHFE copper around RMB 56,000/mt. Although Italy's recent government bond auction was successful, the country's bond yields remain high, propelling Moody's to slash its credit rating, while uncertainty in Greek and Spanish debt woes prevails. In this context, the European debt crisis will continue to dampen the financial market. The Fed will announce meeting minutes this Wednesday, but as the US latest nonfarm payroll data was soft, the Fed is unlikely to introduce QE3 measures over the near term. The US dollar will probably increase again after touching its 10-day moving average, which will exert pressures to copper prices. Technical indicators for both LME and SHFE copper are pointing upside but, LME copper is still pressured down below the 60-day moving average. Once LME copper fails to challenge its 60-day moving average, SHFE copper prices will be dragged down. In China, the latest economic data also slipped marginally, an indication of poor economic situation at present, which, however, has also heightened market anticipation over the government's further relaxation in monetary measures. As there is nearly no price gap among SHFE copper contracts, traders mostly choose to buy more spot copper and sell SHFE copper contracts, which will depress SHFE copper prices. As such, these market insiders see copper prices hovering near current values this week. 

The remaining 16% of market insiders anticipate LME copper will retreat to around USD 7,500/mt and that SHFE copper will fall below RMB 55,500/mt this week. The Shanghai Composite Index already gave up all earlier gains Monday and hit another recent low. According to the latest statistics, the amount of positions on Shanghai stock markets has gained the falling momentum, with the position ratio slipping to 34.06%, the lowest since earlier 2008, a clear reflection of muted market transactions. The Shanghai Composite Index will thus remain weak and negatively affect domestic copper prices. From copper's fundamentals side, some domestic copper smelters conducted unit maintenance during July and will unlikely to depress market supply since June's maintenance did not affect market supply significantly. As these smelters will step up production in 2H in order to meet yearly target, SMM believes spot copper supply will increase, and the stabilizing SHFE/LME copper price ratio will also help imported copper flow into domestic markets, adding to market supply. However, operating rates at downstream enterprises fail to increase, and actual consumption is not seen to improve. Against this backdrop, spot copper premiums are unlikely to increase and will probably turn into discounts, which will send domestic copper prices down. As such, these market insiders expect copper prices to slip this week.