SMM Weekly Review and Forecast (Mar. 11-15)

SHANGHAI, Mar. 11 (SMM) –

Upbeat employment data in the US pushed the Dow Jones Industrial Average to hit all-time high for three consecutive days. In the euro zone, the Q4 GDP contracted by 0.6%, and the ECB cut economic forecast for 2013, weighing down the euro but boosting the US dollar to hit 82.604 points. In response, capital flew out of high risk assets market, and LME base metal prices fell. In China, Chinese government’s strengthened regulation on real estate market further weighed down domestic base metal prices, but the rebound in LME base metal prices at the end of the week boosted market confidence, helping domestic base metal prices to regain early losses. SMMI was flat from a week earlier, with mixed performances for base metals. SMMI.Al rose by 1.18% on the news of State Reserve Bureau’s purchasing, and SMMI.Cu slightly increased by 0.12%. SMMI.Zn led the decline by 1.44%, and SMMI.Pb fell by 0.85%. SMMI. Ni consolidated after falling for two consecutive weeks, and only fell by 0.08%.

Copper
Last Monday, the Chinese government announced tighter property sector controls, which caused the Shanghai Composite Index to tumble by 4%. SHFE copper lost more ground than LME copper, falling by 0.7% to RMB 56,060/mt. Total positions rose sharply by around 30,000 lots as bearish sentiment grew.

In spot markets over the past week, copper discounts turned to premiums as copper futures prices fell. Downstream purchases gradually increased while sale volumes rose sharply. Since there was no significant price gap among SHFE copper contracts and since discounts had narrowed, speculative interest early in the week was low. However, speculators became more willing to enter markets on Friday given growing optimism and since the delivery date for SHFE 1303 copper contracts was approaching and would cause premiums to grow.

In the coming week, SMM anticipates that SHFE copper prices will consolidate at lows and test support at RMB 56,000/mt.

Aluminum
Tougher housing control measures in China sent SHFE 1305 aluminum contract prices down to RMB 14,520/mt last week along with falling stock markets. Later in the week, prices for SHFE 1306 aluminum contracts (the most active one) broke through RMB 15,000/mt following reports on Tuesday that the State Reserve Bureau (SRB) would buy 300,000 mt of aluminum ingot. However, SHFE aluminum for June delivery was stagnant at high prices due to struggle between longs and shorts.  

Spot aluminum prices rose froɭ RMB 14,330/mt to RMB 14,500/mt last week, thanks to production cuts and news that the State Reserve Bureau (SRB) will buy aluminum ingot. Cargo holders held back goods to support prices, while traders actively sought out low-priced deliverable goods, widening the spread between deliverable and non-deliverable ingot. Excess non-deliverable ingot and tepid downstream buying interest held spot aluminum price gains below SHFE aluminum. Spot discounts expanded to near RMB 150/mt. Brief positive flashes will do little to ease the mounting pressure from oversupply, so aluminum prices are still under downward pressure.

In this coming week, LME aluminum should test resistance at USD 2,000/mt, while SHFE 1306 aluminum contract prices will remain stable at RMB 14,800/mt. Spot discounts for deliverable aluminum ingot are expected to narrow slightly with the approach of the delivery date for SHFE current-month aluminum contracts. However, discounts for non-deliverable aluminum ingot will remain due to ample supply. Spot aluminum prices will test support at RMB 14,500/mt, with moderate trading activity expected.  

Lead
The SHFE 1305 lead contract became the most active contract last Tuesday, but its price fell to RMB 14,700/mt under influence from falling LME lead prices. The most active SHFE lead contract price is expected to move between RMB 14,700-14,950/mt.

In China’s domestic spot markets, last week’s trading improved slightly as downstream enterprises resumed production and lead prices fell by RMB 100/mt. Some cargo holders suffering from tight cash flows cut prices, but those with less financial pressure were reluctant to move goods, keeping traded prices at RMB 14,530-14,680/mt. Spot discounts over the most active SHFE lead contract price should be around RMB 150/mt this week with the approach of delivery date, and spot lead prices are expected to be RMB 14,600-14,800/mt. Selling interest among cargo holders may recover as lead prices bottom out, but downstream enterprises will still purchase only as needed to avoid risk.

Zinc
SHFE 1306 zinc contracts became the most actively traded contracts last Tuesday, and SHFE 1306 zinc contract prices moved below all moving averages during the week. Early in the week, SHFE 1306 zinc contract prices met resistance at RMB 15,500/mt, with the low end of the price range touching RMB 15,155/mt, a three-month low. Short momentum was also stronger  compared to the previous week.

In China’s domestic spot markets, spot discounts of #0 zinc against SHFE three-month zinc contract prices narrowed from RMB 250-260/mt two Fridays ago, to RMB 180-220/mt, while  mainstream traded prices fell to a three-month low of RMB 15,000/mt. Smelters were more inclined to hold goods, except to fulfill long-term contracts. Spot discounts continued to narrow, so arbitrage traders released goods and kept supply sufficient. Downstream buyers were cautious due to low orders and falling zinc prices, but overall transactions improved from the previous week.

Downstream enterprises began to replenish stocks after the holiday, so trading inventories were down. Inventories in east China fell by 7,000 mt and returned to pre-holiday levels due to higher operating rates and increased raw material purchases. Inventories in north China fell by 2,000 mt, to 10,000 mt. Stocks in south China only fell by 5,000 mt, to 138,100 mt, which is a result of labor shortages and low orders at some enterprises in Guangdong province. Total inventories in the three regions totaled 529,500 mt, which was down 9,500 mt from a week earlier. As downstream demand grows, inventories should continue to shrink, especially in  south China.

Tin
Last week, LME tin prices kept fluctuating, leaving little support to spot tin prices in China. As such, spot tin prices fell amid depressed demand with mainstream traded prices between RMB 154,500-156,000/mt on Friday. Yunnan Tin Group held its quotes at RMB 158,000/mt. LME tin prices and tin prices in Wuxi started higher but dropped later last Friday, a tin smelter lower ex-works prices, hurting market confidence. Trading have remained thin through last week with supplies adequate.

Nickel
Jinchuan Group cut ex-works nickel prices by RMB 1000/mt, to RMB 117,000/mt on Monday. In the Shanghai nickel spot market, #1 nickel averaged RMB 117,360/mt, down RMB 840/mt from a week earlier. Despite limited purchase from stainless steel mills, increased inquiries and demand recovered injected a dose of confidence in market. As a result, traders kept offers firm last week.

Last week, LME nickel prices fluctuated around 5-day moving average and largely moved between USD 16,450-16,750/mt. LME nickel prices were relatively resilient compared to other base metal prices following previous stumble. On the macroeconomic front, China’s new regulations on real estate market greatly dampened shares of real estate sector, and the Shanghai Composite Index also fell steadily. The euro zone reported stable economic data and absence of solid economic news last week. With regard to the US, the Beige Book report suggested that the US employment data were relatively positive. Compared to issues confronting other economies, conditions in the US are relatively positive, which makes the US dollar welcome by investors. As a result, the US dollar strengthened, exerting downward pressure on base metal prices.

In general, although LME nickel prices still hovered around low level, technical indicators already suggested upward trend. Meanwhile, the overseas economic sentiment was not optimistic. Therefore, LME nickel prices are unlikely to fall sharply in the following week and the overall market sentiment was optimistic.

In China’s domestic market, stainless steel inventories in Wuxi reduced sharply, and purchases for refined nickel also increased in spot market. As a result, offers were relatively firm. SMM expects that firm offers and improved transactions will extend to the following week.