SMM Weekly Review and Forecast (Mar. 25-29)

SHANGHAI, Apr. 1 (SMM) – Last week, the combination of rumors that Cyprus bailout plan might represent a new template for resolving other euro zone banking issues, the political instability in Italy, and weak euro zone economic data drove the euro and commodity prices to fall sharply, while the US dollar rose above 83. Economic data in US were mixed, but US equities remained high, with the Dow and the S&P 500 hitting record highs. Thus, declines in base metals were limited. Base metals fell generally last Thursday as investors left market to avoid risk before the Easter holiday. SMMI fell 0.88% last week. SMMI.Sn was relatively resistance to declines among base metals, while SMMI.Cu and SMMI. Ni presented the biggest losses of 1.08% and 1.19%, respectively, causing Jinchuan Group to cut ex-works prices for refined nickel three times. SMMI.Al, SMMI.Pb, and SMMI.Zn dropped 0.41%, 0.86%, and 0.54%, respectively last week.

Copper
Last week, LME copper prices moved slightly lower as the Cyprus bailout issue and Italian political crisis raised investor concerns. Euro zone economic data was also sluggish, pushing the euro down below 1.28 and dragging down commodity prices as well. The US dollar index rebounded to 83, but recent US major economic data was positive and pushed up Dow Jones Industrial Average to record highs, while dragging down contract copper prices. LME copper prices moved between USD 7,570-7,670/mt during last week, and with the price range below all moving averages. LME copper prices fell to a weekly low of USD 7,522/mt on Thursday night as large numbers of investors closed positions before the Good Friday holiday, but LME prices were still more resistant to declines compared to other base metals. Last week, LME copper inventories also grew to nearly 570,000 mt.

The China Banking Regulatory Commission (CBRC) tightened regulations on financial products, causing the Shanghai Composite Index to plunge by 3.3%. In response, SHFE copper prices fell from RMB 56,300/mt, to RMB 55,300/mt, a drop of 0.7%, then tested RMB 55,000/mt. Selling pressure continued to grow and technical indicators for price trends turned negative.

Aluminum
SHFE 1306 aluminum contract prices followed LME aluminum prices down to RMB 14,615/mt early last week, with little upward momentum for the remainder of the week. The most active SHFE aluminum contract should test support at RMB 14,600/mt in the near term.

Spot aluminum prices in Shanghai fell from RMB 14,560/mt to RMB 14,480/mt last week as tightening liquidity at the quarter’s end drove traders to sell aggressively against tepid buying interest. Traders in Wuxi and Hangzhou held offers comparatively firm, helping aluminum prices stabilize at RMB 14,500/mt, though volumes were thin. 

 In this coming week, LME aluminum prices should test support at USD 1,900/mt, while prices for the most active SHFE aluminum contracts will meet growing resistance at RMB 14,700/mt. Spot aluminum prices should hover near RMB 14,500/mt, with spot discounts expected at RMB 50/mt as liquidity increases at the start of the new month.  

Lead
The SHFE 1305 lead contract price fell from RMB 14,600/mt to RMB 14,430/mt, down only 1% due to strong cost support. SHFE lead prices are expected to move between RMB 14,350-14,500/mt this week.

Spot lead prices in China also drifted down as well, with traded prices for spot lead down from RMB 14,450/mt to RMB 14,350/mt, and with spot discounts of RMB 80-100/mt against the most active SHFE lead contract price. Downstream buyers still purchased according to production needs given limited downstream orders and volatile lead prices. Goods holders were reluctant to sell goods as prices fell below their costs, with many only fulfilling long-term contracts. Trading in spot lead markets is expected to improve slightly this week as some downstream enterprises may replenish stocks before the holiday. Cargo holders will hold prices firm in early April, with spot prices expected between RMB 14,300 and 14,450/mt.

Zinc
In China, SHFE zinc prices fell along with LME zinc prices, giving back early week gains, and falling stock prices on the Shanghai Composite Index also weighed down LME zinc prices. On Thursday, it was reported China’s central bank would repurchase RMB 30 billion in assets, bringing the total liquidity withdrawal this past week to RMB 57 billion, up from the RMB 47 billion in the previous week. New regulations on bank financial products also dragged down securities and financial shares, with the Shanghai Composite Index opening low and closing the week down 2.82%. SHFE zinc prices were also affected, with SHFE 1306 three-month zinc contract prices first losing  RMB 148,45/mt, then dipping to RMB 14,700/mt as short momentum grew stronger.

In domestic spot markets, spot discounts for #0 zinc against SHFE three-month zinc contract prices narrowed from RMB 200-210/mt early in the week, to RMB 90-100/mt. Smelters generally held back goods, with some even cutting zinc ingot output, opting instead to purchase zinc ingots to produce zinc alloy. Some traders held prices firm, but most lacked interest to enter the market as SHFE zinc prices fluctuated weakly. Downstream buying interest was low due to market pessimism and a lack of orders.

SMM sources report inventories continue to fall. Inventories in east China fell by 5,700 mt, to 370,900 mt, as downstream processors began to purchase at lower zinc prices. Inventories in south China have fallen for the first time after the Chinese New Year holiday, with stocks down 4,400 mt, to 134,100 mt, and due mainly to improving labor availability and recovering production. Stocks in north China remained flat at 10,000 mt. In general, domestic trading inventories were 515,000 mt, down 10,100 mt. As zinc prices continued to fluctuate at low levels, smelter had less incentive to produce, causing deliveries to warehouses to fall. However, given current sluggish demand, SMM expects domestic inventories will remain around 510,000 mt.

Tin
Quotations for spot tin in China held steady between RMB 151,000-154,000/mt last week and traded prices were between RMB 150,500-152,500/mt. The slight rebound in LME tin and limited low-priced goods in the market gave certain support to spot tin prices. However, LME tin met resistance to rise further, restricting the support to spot prices, combined with anemic demand, prices only hold stable and lacked impetus to increase.

Nickel
Jinchuan Group raised ex-works nickel prices by RMB 1,000/mt on Monday, but the cut nickel prices by RMB 1,000/mt on both Wednesday and Friday. As of last Friday, Jinchuan Group’s ex-works nickel price was RMB 117,000/mt, down RMB 1,000/mt from the previous week. In the Shanghai nickel spot market, #1 refined nickel prices averaged RMB 117,600/mt, up RMB 210/mt from a week earlier. LME nickel prices moved lower last week, and early in the week, traders were bullish and replenished stocks at lower prices. However, as nickel prices continued to fall, market confidence waned and transactions turned quiet. 

Last week, market pessimism dominated the euro zone due to volatility surrounding the Cyprus bailout plan and political uncertainty in Italy, sending the euro lower. Economic data from the US was less than positive as US jobless claims grew by 21,000 to 357,000, and since Chicago PMI for March fell to 52.4, down from last month’s reading of 56.8. Bearish sentiment also sent LME nickel prices down from USD 17,210/mt to as low as USD 16,635/mt, with losses exceeding 3%. LME nickel inventories began to grow again, up from 162,000 mt to 165,420 mt, increasing inventory pressures.

Generally speaking, the bearish sentiment is keeping LME nickel market prices weak. Strong support is found at the low end, which should limit near-term price declines. 

Domestic stainless steel markets in China remain weak. Sluggish consumption in spot markets and weak LME nickel prices are dampening market confidence and cutting demand for stock replenishments, even at low-end prices. In addition, due to the upcoming Qingming Festival in China later in the coming week, domestic spot trading is expected to be thin.