SMM Base Metals Market Daily Review (2012-10-22)

SHANGHAI, Oct. 23 (SMM)--

Copper

As LME copper prices fell below USD 8,000/mt last Friday, SHFE 1301 copper contract, the most active one, started RMB 890/mt down at RMB 57,820/mt Monday. The contract continued fluctuating weakly following the opening but moved gradually above the daily moving average, as a lot of shorts took profit-taking after prices retreated to RMB 57,500/mt, still with heavy pressure at RMB 57,900/mt and a high at RMB 57,940/mt. SHFE copper prices hovered narrowly around RMB 57,850/mt in the afternoon, with a fluctuating band of merely RMB 100/mt. SHFE 1301 copper contract ended RMB 820/mt or 1.4% lower at RMB 57,890/mt, with trading volumes and positions down 11,920 lots and 6,374 lots, respectively. Trading volumes and positions for SHFE 1302 copper contract added by 12,392 lots and 20,896 lots, respectively. Forward SHFE copper contracts suffered increasing selling pressures and SHFE copper prices will likely lose the support at RMB 57,500/mt in the near future.

As SHFE copper prices fell by nearly RMB 1,000/mt, hedged copper flew wildly into spot markets in the morning, significantly increasing market supply. Spot copper discounts were largely between negative RMB 20-150/mt in the morning business. Traded prices for standard-quality copper were between RMB 57,850-57,920/mt, and RMB 57,880-58,020/mt for high-quality copper. Cargo-holders became more willing to move goods and caused spot copper discounts to widen all the way. Downstream buying increased slightly at prices below RMB 58,000/mt, but overall purchases were cautious in the morning as bearish sentiment grew. In the afternoon, as SHFE copper prices continued fluctuating feebly, mainstream spot copper discounts were negative RMB 30-150/mt. Traded prices were virtually flat with morning levels, and market activity remained weak.

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

Based on the survey, 47% of market insiders are pessimistic over the outlook, expecting LME and SHFE copper will fall to USD 7,900/mt and RMB 57,000/mt, respectively. Major countries this week will announce the latest PMI figures, which are expected by markets to remain sluggish. This will further weigh on the financial market and drag copper prices down. Besides, US equity markets still tend to move lower after posting the largest decline since June last Friday, which will also exert pressures to copper prices. Technical indicators for both LME and SHFE copper are pointing downside. As such, these insiders anticipate copper prices to slip this week. 

The remaining 53% of market insiders see copper prices fluctuating at current values, with LME copper expected at around USD 8,000/mt and SHFE copper around RMB 58,000/mt. As the US presidential election draws near, recent US economic data came in positive, which is favorable to Obama. The US will release the housing data, durable goods orders, as well as 3Q GDP data, mild improvement in these figures will reassure markets somehow and help the financial market stop falling. The US dollar index failed to challenge 80 and continues to struggle among recent moving averages, which may help ease some of pressures to copper prices. European leaders at the EU summit last week reached agreements on setting up a single banking supervisory institution, but the meeting did not yield any substantive results. German economy has been severely hurt by the euro zone debt crisis, and the UK will probably take looser monetary measures. In this context, investors’ risk appetites have abated some as cautious sentiment dominates markets. In China’s domestic markets, central bank bills of RMB 19 billion on the open market will expire this week in addition to reverse purchases of RMB 405 billion. Without any operations, the open market will reduce money of RMB 386 billion this week. This means cash flows will experience fluctuations, and markets anticipate China’s central bank will step up efforts in reverse purchases this week. Once cash flows ease, domestic stock markets will be lifted, which will prop up domestic copper prices. Downstream buying in spot markets increased when SHFE copper prices dipped below RMB 58,000/mt. If cash flows improve, downstream buying will increase further, which will help support low-end copper price.

Aluminum

The SHFE 1212 aluminum contract opened lower at RMB 15,430/mt on Monday as LME aluminum prices plunged by 2% last Friday. Trading volumes were a mere 4,504 lots. The most active contract was resilient to declines compared with other base metals due to limited short selling, but met resistance at the 5-day moving average. Finally, the three-month contract shed RMB 60/mt or 0.39% to close at RMB 15,435/mt. Positions were up 144 lots to 57,470 lots. The most-traded contract fell back to levels seen early last week due to a lack of confidence and is expected to test support at RMB 15,400/mt in the short term.

Spot aluminum was mainly traded between RMB 15,280-15,310/mt in Shanghai on Monday, with discounts between RMB 60-90/mt. Low-iron aluminum was traded between RMB 15,350-15,370/mt. The most active SHFE aluminum contract proved resilient to declines compared with other base metals, but sluggish consumption in spot market dragged spot aluminum prices below RMB 15,300/mt again. Cargo holders were eager to move goods at lower prices at the month’s end, while downstream processors purchased as needed. In the afternoon, the SHFE 1212 aluminum contract slipped slightly. Wait-and-see sentiment dominated the spot market. Sparse quotations were seen at RMB 15,280-15,290/mt, but downstream producers showed little buying interest, leaving trading extremely quiet. 

SMM’s statistics reveal that spot aluminum traded prices averaged RMB 15,290/mt in Shanghai on Monday against RMB 15,312/mt last week. According to SMM’s latest survey of 46 aluminum ingot traders, an overwhelming 57% expect aluminum prices to stay unchanged from Monday’s traded prices this coming week and the rest 43% believe aluminum prices will fall.

LME aluminum prices plunged by 2% last Friday, but remained above last week’s low of USD 1,946/mt, while SHFE 1212 aluminum contract prices stabilized above RMB 15,400/mt after the Chinese National Day holiday, both proving resilient to declines compared with other base metals. Short selling should be very limited despite the fact that LME and SHFE aluminum prices have little chance of rebounding. Neutral traders thus expect LME aluminum prices to move between USD 1,940-2,000/mt and the most active SHFE aluminum contract to fluctuate between RMB 15,400-15,480/mt and spot aluminum prices to struggle at RMB 15,300/mt in this coming week.

LME copper retreated below USD 8,000/mt, suggesting short selling is elevated. LME aluminum inventories exceeded 5 million mt and domestic aluminum stocks in trading markets also rose above 1 million mt. Global economic slowdown and sluggish consumption exacerbated inventory pressure. The chronic European debt crisis caused risk aversion to grow. Aluminum prices will fall along with other base metals. In this coming week, bearish traders believe LME aluminum should struggle at USD 1,950/mt, the most active SHFE aluminum prices will test support at RMB 15,300/mt and spot aluminum prices are expected to hit a fresh year’s low of RMB 15,200/mt. 

Zinc

On Monday, the most active SHFE zinc price gapped lower at RMB 14,960/mt due to the slump in LME zinc prices, falling below the 60-day moving average. In the morning, SHFE zinc prices hovered at RMB 14,960-15,000/mt given the slackening Chinese stock markets. In the afternoon, Chinese stocks began rising, but declines in LME zinc prices weighed on the most active SHFE zinc contract, with prices finally closing at RMB 14,965/mt, down RMB 150/mt, with resistance at RMB 15,000/mt.

In spot zinc market, #0 zinc prices were at RMB 14,810-14,840/mt, with discounts over the most active SHFE zinc contract price at RMB 120-150/mt. #1 zinc prices was firm at RMB 14,800/mt due to limited supply. Smelters were unwilling to move goods, but arbitrage trading was reported. Downstream buyers were still on the sidelines with low buying interest, leaving transactions limited.

Zinc prices generally fluctuated at low levels last week. As the EU summit did not result in positive news last week, the market was depressed. LME zinc prices failed to stand at the USD 1,900/mt and fell below all the moving averages, leading to pessimism of markets.

About 80% of market players believe zinc prices should lost support this week. SHFE three-month zinc contract prices should fall further to RMB 14,800/mt. HSBC’s PMI for major countries will be released on Wednesday, which is expected negative. Besides, the EU summit did not result in positive news, while European debt crisis remained unresolved, causing market concerns to increase. On the other hand, LME inventories continued to surge last week, with supply surplus in global zinc market growing. As a result, LME zinc prices fell to USD 1,870/mt.

In China, SHFE three-month zinc contract prices have no support at low levels. Domestic smelters increased output significantly in September, with supply surplus increasing, and weighing down domestic consumption. Although some smelters were hold goods at lower prices, but goods supply was still ample as traders arbitraged due to narrowing discounts. On the other hand, as the SHFE/LME zinc price ratio rose, imports gained profits. As imported zinc surged into domestic markets, spot prices were pushed down. SHFE three-month zinc contract prices should fall to RMB 14,800/mt this week, and spot discounts will narrow to RMB 80-120/mt.

The remaining 20% believes SHFE three-month zinc contract prices should struggle around the 15,000 mt/yr level. The market was expecting additional stimulus policies as both China and US will change their presidents in November. The US dollar index should struggle at the moving averages this week, with resistance at the 80n mark, and LME zinc prices should struggle around USD 1,900/mt.

Capital available in the market was sufficient as China’s central bank had implemented reserve repurchasing several times in October. With cash supports, smelters will not sell goods, and will give support to domestic prices. The rising Shanghai Composite Index will also support SHFE three-month zinc contract prices. SHFE three-month zinc contract prices should struggle around RMB 15,000/mt, with spot discounts between RMB 130-170/mt.

Lead

SHFE lead prices opened RMB 100/mt lower at RMB 15,540/mt on Monday. Most investors were pessimistic and were unwilling to enter the market. SHFE lead prices hovered at RMB 15,500-15,550/mt and briefly touched a low of RMB 15,465/mt, a new high since early September. Prices finally closed at RMB 15,520/mt, down RMB 80/mt. Trading volumes fell 12 lots to 80 lots, and positions were up 14 lots to 1,200 lots.

SHFE lead prices gapped lower on October 22, while spot lead prices in China were resistant to declines. Well-known brands including Nanfang and Chihong Zn & Ge were quoted at RMB 15,400-15,410/mt, with spot discounts overt the SHFE 1212 lead contract price narrowing to RMB 100/mt. Mengzi and Dongling were offered at RMB 15,350/mt. Quotations for Hanjiang were at RMB 15,330/mt. Downstream buyers were on the sidelines on Monday, while cargo holders were moving goods aggressively. Only limited transactions were done.

With regard to lead price trends this coming week, most industry insiders were pessimistic. 73% of investors contacted by SMM believe spot lead prices may fall to RMB 15,200-15,300/mt this week, with the SHFE 1212 lead contract price expected to move around the 60-day moving average and LME lead prices between the 5- and 60-day moving averages. Given the weakening demand, downstream enterprises expect lead prices will fall further, combined with limited orders, most buyers will still purchase as needed. Smelters will be forced to move goods due to tight cash flows by month’s end, and domestic lead inventories tend to rise slightly. Besides, China’s GDP data for 3Q was in line with expectations, and CPI dropped below 1.9%, cooling expectations for easing policies by China’s central bank. EU summit made no actual progress in resolving the European debt issues, combined with disappointing performances reported by US companies, market concerns over economic recession were rekindled. Thus, many investors may opt to book profits and leave the market.

27% investors expect LME lead will be relatively resilient and move around USD 2,100/mt, while SHFE lead prices should be between RMB 15,500-15,750/mt, and spot lead prices between RMB 15,300-15,550/mt, with spot discounts of RMB 200/mt over the most active SHFE lead contract price. These market players believe SHFE lead prices may rebound after falling continuously by 3.6% following the National Day holiday. Technical indicators also show a sign of turning around. Besides, LME lead prices decreased again and presented a decline of 8,000 mt last week. In China, high cost at smelters will possibly lend some support to low-end lead prices. Thus, some investors hold a view that downward room for lead prices will be limited.

Nickel

In China’s nickel spot market, Jinchuan Group cut ex-works nickel prices by RMB 3,000/mt to RMB 123,000/mt on Monday. In response, mainstream traded prices of nickel from Jinchuan Group slipped to RMB 123,200-123,500/mt, while mainstream traded prices of nickel from Russia fell to RMB 122,100-122,400/mt. Wait-and-see sentiment further grew amid LME nickel price decline. Most traders adopted a wait-and-see sentiment, and transactions were extremely quiet.

Based on result of an SMM survey on market sentiment, 50% market players believe that LME nickel prices will stabilize in the RMB 16,700-17,200/mt range in the coming week. Market focus will shift to the US Fed interest rate meeting result. Although market expects that interest rate will remain unchanged, the meeting will signal the Fed’s attitude towards QE3, which will affect base metal price movement. In addition, the US GDP data for Q3 will also affect market movement. It is expected that GDP for Q3 will be better than a quarter earlier. If the projection is true, QE3 will be restricted. Players believe that LME nickel prices will remain stable amid cautious sentiment before GDP and interest rate result from the US.

30% market players are pessimistic and believe that LME nickel prices will fall below USD 16,500/mt and will finally close at USD 16,000-16,500/mt in the coming week. Spanish’s Asturias province and Balearic Islands asked for financial help from central government, bringing total number of regions requesting financial aid to 8 in Spain. However, during the latest EU summit, Span did not message any financial aid request, which hints possibility that the European debt crisis may continue to drag down LME nickel prices. In addition, the US equity market dived to record a four-month low last Friday due to poor earnings reports from Microsoft, Mcdonald's, and General Electronics. The US tech sector will continue to announce earnings reports from other listed company. If the earnings reports remain weak, the US equity may fall further, which will in turn weigh on LME nickel prices.

The remaining 20% market players believe that LME nickel prices will rise above USD 17,500/mt in the following week, with reasons below. First, technically speaking, LME nickel prices will receive strong support at USD 16,600/mt, and shorts will exit market after profit-taking and longs will enter market once LME nickel prices fall below this level, which will in turn push up LME nickel prices higher. According to data from China, foreign assets have flowed back to China amid RMB appreciation, suggesting that China’s economy has already hit bottom. If China’s economy begins to stabilize, base metal prices will bottom out.