SMM Weekly Review and Forecast (Jan. 7-11)

SHANGHAI, Jan. 14 (SMM) – Despite a last-minute agreement on the US fiscal cliff issue, US Federal Reserve members held divergence over quantitative easing policies. Meanwhile, the US debt ceiling issue also worried investors. In this context, base metals kept fluctuating at existing levels following a wave of considerable increases after the New Year holiday. China's central bank conducted reverse repurchases three times, 5-day reverse repos of RMB 90 billion on January 5th, 7-day reverse repos of RMB 20 billion and 28-day reverse repos of RMB 18 billion on January 8th, and RMB 55 billion on January 10. The bank's action of injecting capital into markets boosted market confidence and helped the Shanghai Composite Index move at highs. Domestic base metals thus posted a stronger performance than LME base metals. However, as the US dollar plummeted last Friday, base metals broke previous trading ranges and began trending higher, with SMMI gaining 0.65%.SMMI.Sn led the increase now that LME tin prices remained firm, and since Yunnan Tin Group suspended production for unit maintenance. Nickel came the next as SMMI.Ni rose by 1.44%, and SMMI.Cu increased slightly by 0.77%. Lead, zinc, and aluminum exhibited resilience but lacked rising momentum, keeping overall gains in base metals in check.   

Copper
SHFE copper prices were more resilient than LME copper and fluctuated narrowly between RMB 58,200-58,500/mt early in the week. The number of positions grew sharply by 36,000 lots and with long investors exhibiting greater buying interest. However, SHFE copper prices followed LME copper up and broke through previous trading ranges on Thursday to hit RMB 58,820/mt, but lacked further upward momentum.

In spot markets last week, cargo-holders continued to move goods, but with the delivery day for SHFE 1301 copper contracts approaching, copper discounts narrowed gradually to RMB 20-100/mt last Friday, down from RMB 100-200/mt on January 4th. Some hedged copper was locked out of markets later in the week, causing market supply to decrease. Downstream producers chose to buy early in the week, but held back later in the week as copper prices rose to RMB 58,000/mt. Market transactions were mainly made by traders, but these transactions also fell off gradually as copper discounts shrank and as the price gap between SHFE copper contracts narrowed.

In the coming week, SHFE copper prices will fluctuate in a narrower band than LME copper, confirming support at RMB 58,000/mt, but with strong resistance at RMB 59,000/mt.

Aluminum
Despite inspiring economic indicators in China, SHFE aluminum prices failed to follow LME aluminum prices up last week on sluggish consumption and no news of the State Reserve Bureau's aluminum ingot purchase. SHFE 1303 aluminum contract prices met resistance at the 5-day moving average, but still found strong support at RMB 15,240/mt as longs and shorts stood on the sidelines. Prices for the most active SHFE aluminum contract rebounded slightly later in the week, but resistance was still strong at RMB 15,300/mt since longs were wary of buying at higher prices.

Domestic spot aluminum inventories exceeded 40,000 mt during the New Year holiday, which caused total inventories to grow to nearly 890,000 mt. Arrivals were limited due to transportation problems, and downstream processors were purchasing as needed after the New Year holiday. As a result, aluminum stocks which had built up during the holiday were sold up last week, helping spot aluminum prices resist declines. SMM aluminum prices averaged RMB 15,040-15,060/mt, and cargo holders held prices firm, taking a strong wait-and-see stance at the beginning of the year and causing spot discounts to fall to zero before delivery of SHFE current-month aluminum contracts. Traders were anxious to move goods since prices were flat with current-month contracts. Later, traded prices fell from RMB 15,070/mt early last week to RMB 15,030/mt as supply grew while consumption remained stable. Overall trading was up.

In this coming week, LME aluminum prices will struggle at USD 2,100/mt and SHFE 1303 aluminum contract prices will hover around RMB 15,200/mt. SMM aluminum price should stagnate at RMB 15,050/mt, with spot discounts returning to above RMB 50/mt after SHFE 1302 aluminum contracts become the current-month contract. Overall trading should be stable.

Lead
Last week, SHFE lead prices mainly moved between RMB 15,100-15,230/mt, with both longs and shorts staying on the sidelines. Influenced by LME lead prices and domestic stock markets, SHFE lead prices will likely edge up to RMB 15,170-15,290/mt this week.

In China's domestic spot markets, traded prices were mainly between RMB 14,650-14,780/mt. Investors in spot lead market were bullish given recent price increases for motive lead-acid batteries. In response, cargo holders held prices firm, with spot discounts over the most active SHFE lead contract price narrowing to RMB 350/mt. Downstream buyers, however, still only purchased as needed. This week, spot discounts over the most active SHFE lead contract price should continue to narrow with the approach of the delivery date. Downstream enterprises will begin replenishing stocks in preparation for the upcoming Chinese New Year holiday, which will drive up lead demand in spot markets, with spot lead prices expected between RMB 14,700-14,850/mt.

Zinc
In China, SHFE 1304 zinc became the most actively traded contract. The Shanghai Composite lost upward momentum and hovered between 2,060-2,090 for most of the week, while LME zinc prices fluctuated weakly. Last Monday, SHFE three-month zinc contract prices fell below the 10-day moving average, then fell below the 30-day moving average and to an intraday low RMB 15,395/mt on Tuesday. China's December trade surplus reached USD 31.62 billion, easily topping the forecasted USD 20 billion. Following this news, SHFE three-month zinc contract prices rose above the 5-day moving average.

In China's domestic spot markets, SHFE three-month zinc contract prices inched down, with  discounts for #0 zinc against SHFE three-month zinc contract prices remaining between RMB 300-330/mt. A few major zinc brand producers continued to hold goods, which limited supply and helped keep spot prices firm. As a result, spot discounts narrowed and caused arbitrage traders to release goods. Downstream enterprises still need to replenish stocks, but most processors would only purchase modestly, which kept overall market activity muted.

Spot supply sent to south China was steady following the New Year's Day holiday, which caused inventories in south China to grow by 7,800 mt, to 108,900 mt. Inventories in east China fell by 5,000 mt, to 381,400 mt, and stocks in north China remained level at 7,000 mt. SMM sources report smelters which sold zinc ingot to the State Reserves Bureau will finish delivery soon, so spot good supply will increase and become sufficient by mid-to-late January.

Tin
Spot tin prices in China kept rising after Yunnan Tin Group announced to conduct maintenance, and hit RMB 158,000-160,500/mt last Thursday from RMB 151,500-154,000/mt before the New Year holiday. However, downstream buyers considered the prices unacceptable, causing transactions to decline since Tuesday. The limited supply of non-leading brands remained a major factor holding spot prices high. Nevertheless, smelters started to vacillate by the end of the week, with price increase slowing.

Nickel
Jinchuan Group raised ex-works nickel prices by RMB 1,000/mt on Monday, then hiked prices again by RMB 2,000/mt on Friday to close the week at RMB 123,000/mt. In the Shanghai nickel spot market, mainstream #1 nickel prices averaged RMB 121,920/mt, up RMB 3,180/mt from a week ago. Market demand and transactions were up from a week ago despite some traders holding back goods in anticipation of higher prices in the future. 

The euro zone Sentix investor confidence index for January and the euro zone PPI for November were both disappointing. In addition, the euro zone unemployment rate for November hit new high of 11.8%, which drove LME nickel prices down to USD 17,160/mt. However, LME nickel prices later rebounded and surged to USD 17,700/mt on positive economic news from China. However, LME nickel inventories also rose by 1.5% from last week to hit 144,342 mt.

Although technical indicators are weak, the LME nickel K chart suggests LME nickel prices are poised to surge. However, if LME nickel inventories continue to grow, LME nickel prices will meet increasing resistance.

In China's domestic markets, transactions are expected to remain strong in the coming week. Supply of nickel is relatively tight, however, since some goods are locked in due to arbitrage transactions, but SMM believes that this situation will not last. Recovered demand will continue to push up spot prices, which will also improve the domestic/LME nickel price ratio.