SHANGHAI, Jul. 30 (SMM) – Last week, the European and US manufacturing data showed continued contraction, and HSBC China PMI for July, though rallied unexpectedly, was still below the 50, indicting the shrink of manufacturing sector. Besides, borrowing costs in Spain and Italy continued climbing, and the risk of a Greek exit intensified. The escalating European debt crisis depressed market confidence, and pushed the US dollar index to hit a two-year high. Thursday night, Draghi’s promise to preserve the euro eased fears in the market, with the euro rebounding and the US dollar index falling to 82.70, trimming the losses in base metals. SMMI fell sharply by 2.29%. SMMI.Cu dropped the most by 2.83%, followed by a 2.55% decline in SMMI.Ni. Other metals also slipped by over 1%.
China’s government restated its commitment to curb the real estate markets, but this news drove the Shanghai Composite Index down by over 2% and to a new low for the year. Against this backdrop, SHFE copper prices slumped to RMB 53,600/mt, down from RMB 56,000/mt on July 20th, a drop of more than 3% for the week. Total trading volumes and positions increased by nearly 1 million and 85,000 lots, respectively, with selling pressures for forward SHFE copper contracts growing. SHFE copper prices stood above the 5-day moving average, but experienced strong resistance at RMB 55,500/mt.
As copper futures prices retreated, traded prices in spot copper markets fell below RMB 55,000/mt, turning investors bearish and flooding spot markets with hedged copper. The SHFE/LME copper price ratio stabilized around 7.3 and compelled imported copper cargo-holders to move goods for cash, leading to an increase in spot copper supply. A narrowing of the price gap among SHFE copper contracts, in addition to higher premiums, left few speculative opportunities for traders. Downstream producers continued to buy only as needed, so overall market transactions were modest.
With technical indicators pointing upward, LME copper prices will likely drift higher in the coming week to USD 7,450 -7,600/mt.
The most active SHFE aluminum contract saw little changes after extending losses early last week. The contract fell to a weekly low of RMB 15,200/mt last Wednesday, but later rebounded and moved within RMB 15,300-15,400/mt due to long buying from aluminum smelters. The contract posted the sharpest fall last Tuesday but the biggest gain among base metals last Wednesday. Longs and shorts struggled to get to the strong position, but trading volumes contracted, leaving aluminum prices stagnated. The most active contract moved to the 1211 contract last Thursday and met stronger resistance at RMB 15,400/mt. SHFE aluminum stayed near current levels while LME aluminum shed heavier losses, sending SHFE/LME aluminum price ratio high at 8.2. The recent large flow of imported aluminum into the spot aluminum markets weighed on domestically produced aluminum.
Dragged down by weak SHFE aluminum, SMM spot aluminum prices slipped to near RMB 15,300/mt for the first three days of last week, the lowest level in the month. Most cargo holders with long-term supply contracts held back on selling at lows, briefly leading to shortage of spot aluminum. As a result, downstream enterprises and middlemen were eager to buy especially last Wednesday. Buying interest, however, weakened at higher prices. Spot discounts were narrowed within RMB 50/mt. Cargo holders were eager to move goods for cash as the month drew to an end and as SHFE aluminum rebounded. Overall trading remained light as consumption weakened.
Last week, SHFE lead prices hit a low of RMB 14,705/mt last week and mainly moved between RMB 14,700-14,900/mt. SHFE lead prices should be stable and between RMB 14,750-15,000/mt.
In China’s domestic spot markets, lead prices were generally below RMB 15,000/mt last week, except for several well-known brands. Some smelters were more willing to move goods due to the urgent need for cash at the month’s end. Supply for branded lead increased since more goods were supplied from warehouses. Downstream enterprises purchased as needed, leaving trading modest. Prices for branded lead should be RMB 14,850-15,100/mt this week, with premiums of RMB 100-150/mt over the most active SHFE lead contract price. Selling interest among smelters may improve as lead prices rise. Downstream replenishment is also expected to grow, lifting transactions.
The SHFE 1211 zinc contract became the most actively traded contract and with prices tracking LME zinc prices, falling sharply last Monday. However, since HSBC’s initial July PMI for China was higher than expected, SHFE 1211 zinc contract prices surged to RMB 14,500/mt on Tuesday. Dragged down by LME zinc prices, SHFE 1211 zinc contract prices fell below RMB 14,500/mt, but declines were smaller than LME zinc prices, causing the SHFE/LME zinc price ratio to rise.
In domestic spot markets, since spot prices fell more slowly than SHFE zinc prices, spot discounts narrowed to RMB 30/mt, down from RMB 70/mt early in the week. Smelters were unwilling to sell goods due to plunging zinc prices, causing market supply of domestic brands to fall. Spot prices were firm between RMB 14,400-14,600/mt, and due to the limited availability of domestic zinc and a rising SHFE/LME zinc price ratio, imported zinc was plentiful in domestic spot markets. Lower spot prices allowed downstream buyers to enter the market and traders to replenish stocks, which boosted transactions.
Last week, spot tin prices in Shanghai fell from RMB 146,000-148,000/mt to RMB 143,000-144,500/mt under the influence of the slump of LME tin prices. The falling tin prices raised the wait-and-see sentiment in the market, and further dampened buying interest among downstream buyers. Cargo holders reported poor sales due to weak demand. The lower prices also discouraged smelters’ selling interest, leaving supply limited. Goods circulating in the market are mainly from Yunxi and Yunheng. Trading remained quiet with both demand and supply still depressed.
On Monday, Jinchuan nickel cut ex-work nickel prices to RMB 116,000/mt, down RMB 3,000/mt. By Thursday, spot nickel prices averaged RMB 115,520/mt, also down RMB 2,190/mt from a week ago. Transactions were mainly made among traders, who replenished stocks at low prices early in the week and then made arbitrage trades later in the week. Downstream buyers also increased purchases at low prices, but traders were unwilling to discount goods, so transactions were limited.
China’s central government will begin inspections of local bourses. China Securities Regulatory Commission recently released instructions to inspector offices in Tianjin, Shanghai, and Guangdong regarding the upcoming inspections.
According to the document’s classification, precious metals bourses can be divided into five categories. The first category contains government-owned bourses, including the Shanghai Gold Exchange and the Shanghai Futures Exchange. Second is the Tianjin Precious Metals Exchange, which has already been inspected by local government officials, has now been approved by the State Council to obtain regular trade qualifications. The third category includes other legal trading platforms which are being inspected and have applied for approvals of the State Council. The fourth and fifth categories include irregular bourses and enterprises which trade gold and engage in illegal gambling.