SHANGHAI, Mar. 26 (SMM) – Cyprus announced plans last Saturday to impose a deposit tax on the country’s bank depositors in exchange for EUR 10 billion in bailout funds, sending global financial markets lower. The European stock markets plunged, weighing down the euro and pushing the US dollar index up to 83. Although the proposal to levy deposit tax was voted down, markets remained worried over the European debt crisis. The US Federal Reserve has decided to keep QE3 in place and the flash March manufacturing PMI from China and the US rose significantly, but manufacturing activity in both Germany and France shrank further, triggering short selling. Against this backdrop, base metals prices fell further at the bottom and are still under downward pressure. SMMI was down 1.34% last week, with SMMI.Cu leading losses by declining 1.72%. SMMI.Sn slid 1.6% on depressing LME tin prices. SMMI.Al and SMMI.Pb were comparatively resilient to losses, down 0.07% and 0.34%, respectively.
Next week, copper prices will continue to fluctuate. The US Federal Reserve will maintain its ultra-low interest rates at between 0-0.25% as long as the US unemployment rate exceeds 6.5%, and will continue to purchase USD 85 billion in government bonds and MBS each month. The US Federal Reserve lowered forecasts for the US economy for the next three years, but predicted the unemployment rate will continue to fall. The US economy continues to recover and if new GDP and manufacturing data due to be released next week is optimistic, financial markets will receive a short-term boost. The latest PMI data from the euro zone, Germany and France fell short of market expectations, with the German PMI hitting a record low for the year and France's PMI hitting a four-year low. The Cyprus Parliament denied a plan for levying a tax on depositors, which was essential to qualify for EUR 10 billion in bailout funds. The European Central Bank emphasized it would supply liquidity to Cyprus under existing requirements and that it would not make any exceptions to rules for Cyprus. Uncertainties surrounding the Cyprus crisis will likely impact financial markets, with the euro expected to fall to 1.29. LME copper prices should fluctuate lower between USD 7,580-7,750/mt.
China's central bank withdrew capital through open market operation for a fifth straight week following the Chinese New Year holiday, with a total of RMB 1.01 trillion removed. Despite sufficient cash flows, the central bank shifted from reverse repurchasing to repurchasing, and will maintain repurchasing operations for the foreseeable future. The continuous withdrawal of capital is also impacting the Shanghai Composite Index, which will remain volatile in the short term. Trading volumes of SHFE copper contracts exceeded 1 million lots, and total positions also surged by 70,000 lots. Short selling pressure will continue to dominate the market, with SHFE copper prices expected to remain volatile, but consolidate near RMB 55,500/mt.
SHFE 1306 aluminum contract prices moved lower last Monday to RMB 14,595/mt, but hovered around RMB 14,700 for the remainder of the week due to struggles between longs and shorts. With sluggish spot aluminum consumption and growing oversupply pressure, prices of the most active SHFE aluminum contracts will unlikely climb to the 5-day moving average until more upward momentum is available.
Spot aluminum is the most resilient one among base metals last week. SHFE aluminum for June delivery plummeted last Monday, driving cargo holders to the sidelines. As a result, spot discounts did not expand even after SHFE 1304 aluminum contracts became the new current-month contract, with discounts holding firm between RMB 70-100/mt. Spot aluminum prices rose from RMB 14,470/mt to RMB 14,540/mt. Middlemen were actively bargain hunting, while downstream producers purchased only as needed. Later in the week, aluminum prices had little upward momentum, stimulating traders to move goods, but overall trading remained only moderate.
In the coming week, the US dollar index should rise and test resistance at 83, keeping LME aluminum prices within a USD 1,900-1,960/mt range and SHFE 1306 aluminum contract prices between RMB 14,600-14,800/mt. In spot markets, with liquidity tightening at the quarter’s end, cargo holders will be anxious to sell, but downstream producers will have little buying interest, leaving spot aluminum prices stagnant near RMB 14,500/mt. Spot discounts of RMB 60-100/mt are expected.
SHFE lead prices fell to RMB 14,410/mt, but gained back losses to hover around the 5-day moving average last week, due mainly in response to a 4.5% rise in the Shanghai Composite Index. SMM expects SHFE lead prices will be RMB 14,400-14,650/mt this week.
In China’s domestic spot markets, spot discounts over the SHFE 1305 lead contract price expanded to RMB 100/mt, with traded prices at RMB 14,400-14,500/mt. Smelters were mainly fulfilling long-term contracts due to low lead prices, while bearish downstream enterprises purchased only cautiously to minimize financial risk. Since spot lead prices have remained low so far in March, and with the average price down RMB 200/mt from February levels, smelters were unwilling to move goods last week. However, they may be forced to sell goods this week given growing inventory pressure. Buying interest downstream will remain low and spot lead prices are expected to be RMB 14,350-14,550/mt.
A substitute plan for the Cyprus bailout was studied by the EU members last Friday. If the latest plan is not acceptable, the Cyprus debt issue will continue to dominate markets in the coming week. Major economic data from Europe and US will also be released in the coming week and positive US GDP data due out this coming Thursday is expected to boost zinc prices. LME zinc prices should move between USD 1,900-1,965/mt in the coming week, and SHFE 1306 zinc contract prices will move between RMB 14,800-15,100/mt. Domestic downstream market will remain sluggish, however, causing spot discounts of RMB 170-220/mt against SHFE 1306 zinc contract prices.
Spot tin prices, influenced by the plunging LME tin prices, kept falling last week, with mainstream traded prices at RMB 150,500-153,000/mt as of last Friday, some deals were even made at RMB 150,000/mt. Downstream demand remained weak and market was dominated by wait-and-see sentiment, leaving trading quiet.
LME nickel prices were volatile last week. International creditors asked Cyprus to levy a deposit tax to fund the EUR 5.8 billion bailout, but depositors made a run on banks, sparking fears of a collapse of the euro. This instability caused LME nickel prices to fall sharply by USD 312/mt after opening on Monday. Later, however, the Cyprus parliament vetoed the deposit tax and the ECB offered support which helped boost confidence in the euro zone. Last Thursday, Cyprus reported it would reorganize the country’s second largest bank, and if successful, Cyprus’ EUR 2.3 billion financing demand would be met. Although the Cyprus problem remains unresolved, LME nickel prices gradually stabilized after falling sharply to USD 16,500/mt. As of last Thursday, LME nickel prices rebounded to USD 16,900/mt and above the 5-day and 10-day moving averages.
Jinchuan Group ex-works nickel prices finished the week unchanged at RMB 118,000/mt following a price cut of 1,000/mt on Monday and an increase of RMB 1,000/mt on Thursday. In the Shanghai nickel spot market, #1 nickel averaged RMB 117,390/mt, down RMB 440/mt from a week earlier. A wait-and-see sentiment was strong and inquiries were limited early last week as LME nickel prices plunged. On Wednesday, some traders replenished stocks as market sentiment improved, so trading volumes and market confidence recovered.
Market concerns over the European debt crisis linger, with risks growing following the Cyprus bailout. LME nickel prices may rebound if a solution is reached, but otherwise, LME nickel prices face the increasing likelihood of falling.
In spot markets, a wait-and-see sentiment is still strong since stainless steel markets are still sluggish and LME nickel prices remain volatile. SMM expects caution to dominate trading given that no improvement in downstream demand is expected in the short term. SMM expects transactions will mainly be made among traders in the coming week. Trading will be sluggish unless nickel prices rise.