SMM Copper Market Daily Review (2013-3-11)

SHANGHAI, Mar. 12 (SMM) – With LME copper drifting down last Friday, the most active SHFE 1306 copper contract opened slightly RMB 280/mt down at RMB 56,470/mt Monday. Following the opening, the contract reversed declines in just two minutes as short investors closed positions, but suffered resistance at a high of RMB 57,070/mt before hovering around RMB 56,700/mt, the daily moving average. SHFE copper prices, however, posted relatively weak performance in the afternoon, and basically came under pressure at the daily moving average. SHFE copper prices expanded declines at the tail of trading, and slid to levels around the opening price, with a low at RMB 56,450/mt. SHFE 1306 copper contract finally closed RMB 280/mt or 0.49% lower at RMB 56,470/mt, with trading volumes and positions up 7,066 lots and 986 lots, respectively. Trading volumes for SHFE 1307 copper contract added by 16,054 lots, and positions increased by 10,314 lots. The most active copper contract tended to shift to SHFE 1307 copper contract. With upside pressure increasing, SHFE copper prices are likely to test support at RMB 56,500/mt repeatedly for the foreseeable future.

SHFE copper prices were volatile, but spot copper cargo-holders held divergent views. Some cargo-holders became reluctant to move goods since their hedged copper can not make profits, causing overall spot copper supply to decrease further. In this context, copper offers all turned into premiums, mainly between RMB 20-120/mt in the morning business. Traded prices for standard-quality copper were between RMB 56,600-56,680/mt, and RMB 56,680-56,750/mt for high-quality copper. However, high premiums were resisted by downstream producers. Market transactions for high-quality copper at premiums of more than RMB 100/mt were limited, and overall market activity was also relatively lackluster. In the afternoon, as market trading was slow, some cargo-holders began to slash premiums, down to RMB 10-90/mt, while traded prices were RMB 56,580-56,700/mt.

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

Based on the survey, 53% of market insiders are upbeat, believing that LME copper will rally above USD 7,800/mt and SHFE copper will challenge resistance at RMB 57,500/mt. Last Friday's US non-farm payrolls were significantly higher than expected, and other economic data also kept rising momentum, signaling that the US economic recovery has accelerated. The negative impact from automatic spending cut has yet to appear as US stable economy and low interest rate enticed more market capital to flow into stock markets. Coupled with market optimism over the upcoming US retail sales data and other economic figures, US equity markets are likely to extend increases, which will help drive copper prices higher. Crude oil prices have recently broken pressure at recent moving averages, which should also guide future copper price movement. In China's spot markets, with the delivery date for SHFE 1303 copper contract nearing, cargo-holders will continue to insist on firm prices and help copper premiums sustain. Meanwhile, downstream consumption has also improved gradually, heightening market anticipation over copper demand in both March and April from top consumer China. Hence, these optimists hold the view that copper prices will reverse earlier weakness this week.

However, 21% of market insiders predict copper prices will extend declines. LME copper may slide below USD 7,700/mt to USD 7,600-7,650, and SHFE copper will probably test support between RMB 56,000-56,500/mt. In Europe, Fitch and Moody's both lowered credit rating to Italy last week, while a new government has not been formed, increasing the possibility of holding the second general election. Once this happens, new crisis will break out at any time. Moreover, the US dollar index remains strong, which will weigh heavily on copper prices. According to the latest CFTC report, net short positions already expanded to 5,587 lots March 5, an indication that fund managers are bearish over copper prices over the short term. Technical indicators for both LME and SHFE copper tend to point downside. In spot markets, downstream producers resisted high premiums and dampened market transactions during the first trading day this week. If copper premiums continue ahead of the delivery for SHFE 1303 copper contract, speculative interest will be depressed, which will be negative for market transactions. This will push copper prices down. Furthermore, LME copper stocks has increased for more than three months, up to more than 510,000 mt this week, but the proportion of cancelled warrants to total LME stocks remained below 5%. The weak copper's fundamentals side will further drag copper prices down.      

The remaining 26% of insiders are conservative about the outlook, anticipating that LME copper will hover between USD 7,700-7,800/mt and SHFE copper will fluctuate around RMB 56,700/mt. China's economic data released last weekend was negative. Although the growth rate of real estate investment surpassed 20%, the CPI increased by 3.2% in February, a new 10-month high, both higher than January's 2.0% and market estimates of 3.0%. At the same time, the total retail sales of consumer goods grew by merely 12.3% YoY during January-February, well below this year's 14.5% target set by the government. These unfavorable economic figures reflected that China's economic recovery lacks momentum. China's new loans for February were also lower than market anticipations. China's central bank conducted RMB 5 billion repo operations March 7 and drained capital for a third consecutive week following the Chinese New Year holiday. However, markets responded little to this move as the capital interest rate continued to fall with 7-day repo rate hitting a fresh 6-month low. The central bank's repo operations earlier raised market speculation that it will tighten market liquidity. Nevertheless, as the high funds outstanding for foreign exchanges were reported for January, and since the amount of capital drained was low, investors become upbeat again about loose monetary policy. Last weekend's negative Chinese data will give pressure to Chinese A-share market. Nonetheless, China Securities Regulatory Commission allowed residents from Hong Kong, Macao and Taiwan to invest in Chinese A-share market, positive news for Chinese stock markets. In this context, Chinese stock markets will fluctuate near current levels this week. As such, these market insiders anticipate copper prices to stay within their previous trading range.