SHANGHAI, Jan. 21 (SMM) - Inflationary pressure in China is growing again and debt ceiling negotiations in the US remain deadlocked, worrying investors. Meanwhile, mixed economic data from China and the US is keeping markets cautious. In this context, the US dollar index rebounded mildly to test resistance at 80. Base metal prices rose after initially rising. SMMI fell 0.45% last week, with SMMI.Zn down 0.46%, SMMI.Cu dropping 0.55%, and SMMI.Al declining 0.6%. Tin and nickel outperformed other base metals, with SMMI.Sn advancing 0.62% and SMMI.Ni rising 0.33%.
The Shanghai Composite Index repeatedly tested 2,300 last week, but remained volatile. SHFE copper prices slid from RMB 58,600/mt to RMB 57,600/mt, a decline of 1.7%. With long and short investors struggling at RMB 58,000/mt, SHFE copper prices proved more resistant to declines than LME copper, which helped the SHFE/LME copper price ratio rise to around 7.27.
In spot markets last week, with the price gap between SHFE 1301 and 1302 copper contracts expanding to RMB 300/mt before delivery of SHFE 1301 contracts, spot copper cargo-holders attempted to raise premiums to RMB 100/mt. However, premiums were brief and copper discounts returned to between RMB 100-200/mt following the delivery for SHFE 1301 copper contracts. Speculators bought spot copper and sold SHFE copper contracts. Domestic standard-quality copper cargo-holders were unwilling to move goods and insisted on firm prices, limiting discounts. Downstream producers still bought as needed, and only some speculators took the opportunity to enter markets. As a result, most market transactions were between traders.
With support consolidating at RMB 57,800/mt and growing market confidence over future copper prices, SHFE copper prices will likely to fluctuate around RMB 58,500/mt in the coming week.
The Shanghai Composite Index was in correction and LME aluminum prices extended losses last week. Coupled with weak fundamentals in spot aluminum market, sell-off by shorts was triggered. Prices for the most active SHFE aluminum contract remained above RMB 15,200/mt last Monday, but fell the next day due to short selling and hovered around RMB 15,150/mt for the remainder of the week.
It was widely believed earlier that aluminum prices would stabilize above RMB 15,000/mt. The decline in SHFE 1303 aluminum contract prices last Tuesday triggered strong bearish sentiment. Aluminum processors have begun building stocks as the Chinese New Year draws near, but demand has been soft, dampening market confidence. Transportation problems prevented aluminum inventories in east China from growing, but oversupply pressure remains. Traders were anxious to sell at lower prices, sending aluminum prices down to near RMB 14,900/mt. Spot discounts rose above RMB 100/mt after SHFE 1302 aluminum contracts became the current-month contract. With bearish factors remaining, aluminum prices at home and abroad will come under downward pressure
LME aluminum prices will likely move lower in the coming week to test support at USD 2,000/mt, while SHFE 1303 aluminum contract prices will hover around RMB 15,150/mt as longs and shorts exit the market. Spot aluminum prices should test support at RMB 14,900/mt, with spot discounts above RMB 100/mt. Overall trading should be thin.
The 1303 SHFE lead contract became the most actively traded contract last week, with prices moving around RMB 15,300/mt before dipping to RMB 15,035/mt, its lowest mark since August 2012. Although the US housing starts hit a four-year high and the initial jobless claims fell to their lowest level since January 2008, market players were still concerned over the US debt ceiling issue. SHFE lead prices, influenced by LME lead prices and the recent surge in SHFE lead inventories, should be between RMB 15,130-15,330/mt this week.
Spot lead in China was traded last week at RMB 14,630-14,740/mt, with spot discounts over the most active SHFE lead contract price narrowing to RMB 350-450/mt. Hedge trading increased slightly at mid-week, but trading remained weak as cargo holders held prices firm since downstream buyers had no plans to replenish goods ahead of the Chinese New Year holiday. Despite limited orders at downstream enterprises and high finished goods inventories, downstream buyers are expected to increase raw material purchases this week due to the approaching Chinese New Year. Smelters will be actively moving goods to relieve financial pressures, so spot lead prices are expected to be between RMB 14,650-14,800/mt.
In China, SHFE 1304 zinc contract prices tracked sluggish LME zinc prices. The Shanghai Composite Index soared to 2,300 last Monday, a daily increase of 3.06%, while SHFE three-month zinc contract prices rebounded and briefly touched RMB 15,495/mt in morning trading. However, short momentum strengthened on Tuesday, sending SHFE 1304 zinc contract prices below RMB 15,400/mt and as low as RMB 15,165/mt, a daily loss of 1.8%. SHFE 1304 zinc contract prices then generally fluctuated between RMB 15,200-15,300/mt, and proved resistant to declines than LME zinc prices. Despite strong resistance at the 60-day moving average, SHFE prices found support at RMB 15,200/mt.
In China’s domestic spot markets, SHFE zinc prices fluctuated at low levels. Spot discounts for #0 zinc against SHFE three-month zinc contract prices narrowed from RMB 280-300/mt to RMB 210-230/mt, but this price prompted arbitrage traders to become more active. In this context, goods supply was still sufficient despite major brand producers holding back goods. Further downstream, as spot zinc prices fell to RMB 15,000/mt, producer buying interest improved, but only modestly. Supply of #1 zinc was tight since producers were holding back goods, which forced some consumers to turn to imported zinc. Quotes for AZ and KZ brands were generally RMB 20/mt below domestic #0 zinc prices and overall transactions were muted.
In China, spot tin prices rose early last week to RMB 160,000/mt, with mainstream traded prices between RMB 160,000-161,000/mt. Quotations from Yunnan Tin Group remained firm at RMB 164,000/mt, while Chengfeng held ex-works prices at RMB 162,000-162,500/mt. Investors in spot tin market only waited on the sidelines since Wednesday as LME tin prices met resistance, combined with lower prices offered in Wuxi, the increase in spot tin prices was curbed. Traded prices in spot market were mainly around RMB 160,000/mt last Friday, with moving range narrowing. Trading was modest as few buyers planned to stock goods for the upcoming holiday.
LME Nickel Price Trends
1. Annualized growth of China’s 4Q GDP was 7.9%, slightly better than the forecasted 7.8% and up from 3Q’s 7.4%. In addition, China’s annualized retail sales and industrial output for December were both better than expectations.
2. New housing starts in the US during December rose by 12.1% compared to November, the largest gain since July 2008. In addition, initial jobless claims were only 335,000, better than the 369,000 expected and down from the previous reading of 372,000, and the largest decline in four years.
3. 4Q earnings reports from Citigroup, JPMorgan, Goldman Sachs and other financial giants were better than markets expected, helping boost markets, despite the 63% drop in profits at Bank of America.
1. The existing US debt limit will be reached sometime in the next 1-2 months and Fitch has warned it may cut the US credit rating if the US Congress fails to act.
2. The unexpected decline in Germany’s GDP and euro zone industrial output weighed on market sentiment.
3. The US Federal Reserve official were divided on whether or not to continue QE4. Based on recent US CPI data, the US still can maintain QE measures if the CPI does not rise.
4. LME nickel inventories surged after the New Year holiday, from 139,908 mt on December 31st to 147,342 mt January 17th, a gain of over 5%. Inventory pressure may now prevent LME nickel prices from rising further.
In general, the global economy continues to improve modestly, but without solid economic news, nickel prices will continue to fluctuate and move without strong upward momentum. If positive news is announced, LME nickel prices may advance further.
Although transactions are currently quiet, most traders are optimistic, believing pre-Chinese New Year holiday stock replenishments will boost domestic nickel prices.