SMM Base Metals Daily Review (2013-3-11)

SHANGHAI, Mar. 12 (SMM) –

Copper

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.

Aluminum

SHFE 1306 aluminum contract prices opened at RMB 14,960/mt on March 11. Shorts increased as growing inflationary pressure in February triggered fear that monetary policy will tighten in the short term, driving the most active aluminum contract below RMB 14,900/mt at the tail of trading. Finally, SHFE aluminum for June delivery closed at RMB 14,895/mt, down RMB 70/mt or 0.47%. Positions increased 1,800 lots to 93,412 lots. SHFE aluminum prices fell back as positive impact from news that the State Reserve Bureau will buy aluminum ingot has faded, but downside space should be limited. The most-traded SHFE aluminum will find strong support at RMB 14,800/mt.

Spot aluminum was mainly traded at RMB 14,530-14,550/mt in Shanghai on Monday, with discounts at RMB 110-130/mt. Low-iron aluminum was traded around RMB 14,700/mt. SHFE 1306 aluminum contract prices edged down. Most traders held offers firm at RMB 14,540/mt on news that the State Reserve Bureau (SRB) will buy aluminum ingot. Some deliverable brand aluminum ingot was quoted at higher prices of above RMB 14,600/mt. Downstream producers were little interested in buying, with only middlemen purchasing limited amounts, leaving overall trading light. In the afternoon, prices of the most active SHFE aluminum contracts moved at low levels, dampening market sentiment in spot markets. A few traders held offers at RMB 14,530-14,540/mt, but inquiries were rarely heard.
 
SMM aluminum price averaged RMB 14,428/mt last week, down RMB 52/mt on a weekly basis, and averaged RMB 14,350/mt on Monday. A majority of the 34 domestic aluminum ingot traders and producers surveyed by SMM expect spot aluminum prices to stabilize this week. This is because spot aluminum prices later climbed to RMB 14,500/mt after tumbling to near RMB 14,300/mt early last week on news that the SRB will buy 300,000 mt of aluminum ingot, proving resilient in the short term. 

85% of market players are neutral towards this week’s aluminum prices for the two reasons. First, growing inflationary pressure in China rekindled fear that monetary policy will tighten, causing aluminum prices to give back gains recorded last week. Second, a firm U dollar, weak Shanghai Composite Index and sluggish consumption have offset positive impact from news that the SRB will purchase aluminum ingot. With shorts returning to the market, aluminum prices in domestic and overseas markets will come under downward pressure. In this coming week, LME aluminum may lose support at USD 1,950/mt, and SHFE 1306 aluminum contract prices will fall to RMB 14,800/mt at the bottom. Spot aluminum prices should hold stable at RMB 14,500/mt as the delivery date of SHFE current-month aluminum contracts is approaching.

The remaining 15% of market players are optimistic over aluminum prices this week. They believe domestic aluminum prices will remain resilient before the SRB’s aluminum ingot purchasing plan and bidding price are announced. Although the US dollar index surged, LME aluminum has found strong support at USD 1,950/mt. Coupled with growing expectations for consumption recovery in 2Q, SHFE aluminum for June delivery should hold steady at RMB 14,900/mt. Spot aluminum prices will challenge resistance at RMB 14,600/mt. With the delivery date of SHFE current-month aluminum contracts drawing near, spot discounts will narrow and overall trading will rebound slightly.

Lead

As the US nonfarm payrolls were reported positive, driving up US dollar and weighing down LME lead prices, SHFE lead prices opened lower at RMB 14,560/mt on Monday, and soon rose RMB 200/mt, to hover between RMB 14,760-14,800/mt before closing at RMB 14,765/mt, down RMB 65/mt. Trading volumes were up 68 lots to 212 lots, and positions were up 94 lots to 2,356 lots.

In China’s spot lead market, spot discounts over the most active SHFE lead contract price narrowed to RMB 130/mt on March 11 with the approach of the delivery date. Quotations for Chihong Zn & Ge were at RMB 14,640/mt, while Nanfang was quoted at RMB 14,580/mt. Tongguan and Shuikoushan were quoted at RMB 14,650/mt. Downstream buyers purchased as needed while smelters were still unwilling to move goods, leaving trading muted.

SMM survey reveals that 80% industry insiders are cautious towards lead price trends this week. Most downstream enterprises only purchased according to production needs since outlook for lead price trends is unclear and since orders for downstream enterprises have yet to fully recover, which leaves great inventory pressure. Most cargo holders reflect the falling lead prices and squeezed profits further undermined selling interest, lending certain support to lead prices. With respect to macroeconomic conditions, the US PMI and employment market remained positive. However, the growth of China’s CPI exceeded market expectations in February, and the new lending issued in February was well below January’s level, indicating limited recovery of China’s economy and larger inflationary pressure. In Europe, the euro continued to weaken, and Italy’s rating was cut by the Fitch due to uncertain result for Italy’s election, adding to market concerns. In addition, base metal markets will lack clear guides this week due the absence of important events. Thus, these investors expect LME lead prices to move around USD 2,200/mt and spot lead prices to be RMB 14,550-14,650/mt.
 
20% market players are bullish to lead price movements this week, noting the nonfarm payroll data which staged a new low since 2008 will continue to benefit base metals. The US equities also hit new highs due to positive economic data, while technical indicators showed the US dollar may meet resistance at 83 with upward room limited. Although the euro keeps falling, European equities present a strong trend. In China’s spot lead market, replenishments will increase with production at lead-acid battery producers recovering gradually, and buying interest should be lifted with declines in lead prices arrested. In this context, these investors believe spot lead prices will increase RMB 50/mt this week to RMB 14,600-14,700/mt, and LME lead prices should move between USD 2,210-2,240/mt.

Zinc

SHFE 1306 zinc prices, the most actively traded contract, opened down at RMB 15,265/mt on Monday due to weaker LME zinc prices, and then struggled at RMB 15,260/mt. Then, the falling stocks prices added to short pressures, and so the contract hit an interday low of RMB 15,180/mt. As LME zinc pared some losses, SHFE zinc market managed to return RMB 15,260/mt. In the afternoon session, the contract fluctuated at lows, and finally closed at RMB 15,220/mt, down RMB 110/mt or 0.72%. Transactions were up 16,998 lots to 84,466 lots, while positions were up 10,712 lots to 126,892 lots.

In the spot market, discounts of 0# zinc over SHFE 1305 zinc contract narrowed slightly to RMB 180-200/mt, with deals between RMB 14,970-14,980/mt. #1 zinc mainly traded at RMB 14,940-14,960/mt. Smelters held goods back, and spot discounts narrowed as a result, leaving ample supply as arbitraged goods entered the market. Downstream producers, however, showed low buying interest, leaving little improvement in transactions.  In the afternoon business, discounts of 0# zinc over SHFE 1305 zinc contract were around RMB 190/mt, and traded prices were down marginally to RMB 14,950-14,960/mt.

As China tightened restrictions to the property market, and since the US dollar index strengthened, zinc prices continued to fall last week.

According to SMM latest survey, 47% of market players surveyed by SMM believe zinc prices should fluctuate between USD 1,970-2,000/mt, and SHFE 1306 zinc contract prices should move between RMB 15,155-15,450/mt, with spot discounts between RMB 270-310/mt. The Reserve Bank of New Zealand is expected to maintain interest rates unchanged, and even if it changes the rates, base metals market will not be affected significantly. Italy’s government formation and US spending cuts will take center stage this week. If Italy fails to form any new government this Friday, the country has to launch another election. Besides, the US Federal Reserve will hold a meeting to decide March interest rates next Tuesday and Wednesday. Bernanke and Yellen both supported easing policies, and the US non-farm data is insufficient to change Monetary Policy Committee’s mind. The FOMC will not change its asset purchase plan at the meeting. But investors will remain cautious before the release of the interest rates result, so base metals prices will not fluctuate significantly.

Domestic smelters were holding goods as zinc prices continued to fall, and most goods supply is from arbitrage traders. As downstream market improves, downstream buying interest will increase and allow zinc prices to stop falling this week.

30% of market players believe zinc prices should continue to drop, but declines will narrow. LME zinc prices will dip to USD 1,966.5/mt, and SHFE three-month zinc contract prices will challenge RMB 15,000/mt, with spot discounts narrowing to RMB 250-280/mt. The strengthening US dollar index and weakening euro are major force that hit zinc prices. The US dollar index has been pushed up by US improving economic data and expectations that the US central bank will quit QE. Recent news shows US economy will likely expand more rapidly, and will be attractive for more investors to buy US dollars, which will drive the US dollar index and weigh down zinc prices. Besides, LME zinc inventories were a high 1.19 million mt, which also pulled down zinc prices. As environmental protection inspections were implemented in north China, operations at some enterprises were restricted due to irregular environmental protection measures, and this also restrained demand for zinc.

The remaining 23% believe zinc prices should rebound slightly. Improving downstream demand will drive zinc prices to rebound but increases will be modest. LME zinc prices will challenge USD 2,020/mt, and SHFE 1306 zinc contract prices will test RMB 15,500/mt, with spot discounts expanding to RMB 300-340/mt. US will release the number of first-time jobless claims for the week ending March 9th and the preliminary March CCI from University of Michigan. Major US economic data is optimistic. Citizens from Hong Kong, Macao and Taiwan will be allowed to open an A share account starting April 1st. That will positively affect the Shanghai Composite and boost market confidence, and will pull zinc prices to rebound.

Tin

In Shanghai tin market, spot prices were mainly between RMB 154,500-156,000/mt on Monday with trading light. LME tin prices continued to increase last Friday, but failed to give any support to spot tin prices in China. Despite limited supplies, weak transactions weighed down spot prices.

SMM survey showed that 45% industry insiders believe tin prices will remain stable this week. LME tin prices are stabilizing, but still under resistance which will limit the increase, combined with the depressed demand, these investors expect tin prices to remain flat.

35% market players believe spot tin prices will continue to fall this week. Although LME tin prices are unlikely to fall further in the short term, upward room should be limited, which will also hurt market sentiment in domestic market. Besides, the weak demand will prevent tin prices from rising. As such, spot tin prices are expected to fall further even though LME tin prices present no decline.

The remaining 20% investors believe tin prices will edge up, expecting LME tin prices to break above USD 23,800-24,000/mt, which may give a boost to market and help improve transactions.

Nickel

During the morning trading hours in the Shanghai nickel spot market, mainstream traded prices of nickel from Jinchuan Group were between RMB 117,600-117,900/mt, and mainstream traded prices of nickel from Russia were between RMB 116,700-116,900/mt. As transactions were sluggish, offers of Jinchuan nickel fell to RMB 117,700, and offers of Russian nickel to RMB 116,700/mt during the afternoon trading hours. The absence of arbitrage opportunity made transactions sluggish in spot market.

According to SMM survey on market sentiment, 70% market players believe that LME nickel prices will consolidate around exiting level and will move between USD 16,500-16,700/mt. They hold that although the US dollar strengthened on upbeat economic data from the US, LME nickel prices will move less sensitive towards impact of US dollar in the future.

20% market players project that LME nickel prices will LME nickel prices will advance to hit USD 16,700/mt. Stainless steel inventories in Wuxi fell by 2.99% MoM to 189,808 mt, with stocks of #300 stainless steel down 0.81%, #400 stainless steel down 7.62% and #200 stainless steel down 13.79%. Although stainless steel pries remained stable, the improving transactions eased pessimistic sentiment. This will help boost demand for nickel, lending support for nickel prices. In addition, technical indicators suggest that LME nickel prices are expected to rebound slightly.

The remaining 10% market players expect that LME nickel prices may fall to USD 16,450/mt. The pessimistic players hold that the Shanghai Composite Index may fall below 2300 points after tumbling for three consecutive days. In addition, the US dollar rallied, which will weigh on nickel prices. If economic data in the US improve further, market expectation over ending of QE will grow, which will drag down nickel prices as well.