SMM Copper Market Daily Review (2013-3-18)

SHANGHAI, Mar. 19 (SMM) – LME copper prices started lower overnight and the SHFE 1306 copper contract price gapped RMB 320/mt lower at RMB 56,330/mt Monday due to report that Cyprus decided to collect a nearly 10% tax to depositors. The contract dropped to RMB 55,000/mt soon after opening due to selling pressures and hit a low of RMB 54,810/mt, resulting in the shift of the most active SHFE copper contract price, but allowing opportunities for arbitrage trading. SHFE copper prices then stopped falling and moved within a narrow range of RMB 50/mt at midday. LME copper prices fell below USD 7,600/mt in the afternoon while the A-share slumped 1.7%, driving the SHFE 1306 copper contract price to close at RMB 55,300/mt, down RMB 1,710/mt or 3%. The SHFE 1307 copper contract price began at RMB 56,310/mt and closed RMB 1,840/mt, or 3.23% lower at RMB 55,190/mt, with the lowest price at RMB 54,660/mt. Holdings of the SHFE 1307 copper contract were up 87,254 lots and trading volumes increased 237,000 lots, with total trading volumes up 393,000 lots and total positions up 84,758 lots. SHFE copper will still be under downward pressure given the panic caused by the tumbling prices.

Shanghai spot copper premiums were quoted between 0-100/mt in the morning business. Traded prices for standard-quality copper were between RMB 56,750-56,930/mt, and RMB 56,800-57,050/mt for high-quality copper. SHFE copper prices marched higher after starting up, so hedged copper was still locked out of spot copper markets. The price gap among forward SHFE copper contracts expanded to nearly RMB 300/mt, enticing some speculators to buy at lows. However, these speculators chose to sell after copper prices rose, causing spot copper premiums to shrink all the way. Standard-quality copper saw a rapid decline in premiums, down to around RMB 0/mt, increasing its price gap with high-quality copper. Most downstream producers and traders took a wait-and-see posture before delivery for SHFE 1303 copper contract, leading to quiet market activity.

SMM survey reveals that 50% market players believe copper prices will extend the declines this week, with LME copper falling below USD 7,500/mt and SHFE copper prices testing support at RMB 54.500/mt. The euro zone members and the IMF agreed to offer EUR 10 billion bailout aid to Cyprus on March 16, but on condition that Cyprus must collect up to 9.9% tax from depositors which triggered public discontent. In response, risk currencies, led by the euro, weakened noticeably, while the US dollar staged a strong upward trend, and global stock markets tumbled. Investors feared the Cyprus economy might further deteriorate, causing another round of bank runs and rekindling market concerns over a resurgence of the European debt crisis. Market players will focus on bond market, expecting any increase in bond yields in Spain or Italy will be another hit to the euro and thus drag down copper prices. Besides, technical indicators for both LME and SHFE copper pointed downward, posing great pressures on prices. On the market side, copper inventories both at home and abroad remained high, but copper demand was still depressed, weighing on copper prices. SHFE copper inventories have jumped above 200,000 mt, while LME copper inventories were also close to 550,000 mt. CFTC report indicated that net positions kept growing to 6,144 lots as of March 12, adding to wait-and-see sentiment in the market. In China, the NPC and CPPCC sessions came to an end March 17, China’s new Premier Li Keqiang held a press conference in the afternoon to express the new government’s ideas about the next five years, sending positive signals. However, Li also emphasized the importance to tighten control on three public consumptions and to curb property prices. Hence, market expects the government will unlikely ease property control next year, which will negatively affect base metals demand. Meanwhile, repos worth of RMB 30 billion and RMB 10 billion will mature on March 19 and March 21, and investors expect the People’s Bank of China (PBOC) should continue to issue repos to balance market liquidity. Meanwhile, market concerned IPO will be re-launched soon with Guo Shuqing, head of the China Securities Regulatory Commission leaving the office and with IPOs lined up. Zhou Xiaochuan, governor of the PBOC implied monetary policy will be relatively tight this year with the pace of draining liquidity accelerating. The RMB 3.05 billion worth of unlocked shares of 39 companies will also be a lasting liquidity pressure. The A-share is also under downward pressure, leaving little support to copper prices. In spot copper market, spot premiums over the most active SHFE copper contract price only remain at RMB 100/mt despite the slumping SHFE copper prices. Hedge traders and cargo holders should be willing to sell goods at higher prices to generate cash if copper prices continue to fall, and spot copper may be traded at discounts, curbing SHFE copper prices. Thus, these investors expect copper prices to drop further this week.

39% market players believe copper prices will keep vacillating this week, expecting LME copper to hover near USD 7,600/mt and SHFE copper prices to move around RMB 55,000/mt. Although the US economic data continued to improve, the US equities met technical resistance and will likely fluctuate narrowly at high levels in the short term, limiting moving range for LME copper prices. Besides, the Fed’s March policy meeting scheduled for this week is of great importance as the scale of the QE policies and US economic forecast will be unveiled. Although market players believe the Fed will not made significant change in monetary policies, the attitude towards QE is much concerned. Fed’s Chief Ben Bernanke noted in the minutes for February meeting the cost for asset purchasing program will be watched closely at the meeting this month. The upward room for the US dollar will be restricted if Bernanke wavers given improvement in the US economy, driving the US dollar index to fluctuate at the current levels. Meanwhile, copper prices were relatively resilient to declines against the strong US dollar considering the performance last week. Furthermore, Asian investors’ buying activity of LME copper enlivened following last week’s plunge. In this context, these investors believe copper prices to remain weak this week.

The remaining 11% investors believe copper prices will likely rebound, with LME copper returning to USD 7,750/mt and SHFE copper rising to RMB 56,500/mt. Although base metals slumped on Monday, market is optimistic to economic data to be released this week. Besides, technical rebound is expected after the plunge last week. In domestic spot copper markets, smelters were unwilling to move goods given the low prices, while downstream buyers started purchasing when copper prices fell. Therefore, these market players expect copper prices to rally this week.