SHANGHAI, Apr. 15 (SMM) – China’s March CPI rose 2.1% YoY, far better than expected and easing inflationary pressure. Expectations for easing policy from the People’s Bank of China are growing. However, China’s March PPI slipped 1.9% YoY, pointing to negative growth for a 13th straight month. As a result, the Shanghai Composite Index struggled at 2,200 points. The minutes of the US Federal Reserve meeting offered nothing new. Although initial jobless claims in the US fell sharply last week, the March non-farm payrolls were quite disappointing. The US dollar index fell, helping US stock markets rise steadily. Base metals prices rebounded, but only slightly. SMMI climbed 0.91% last week. SMMI.Zn led the gains among base metals by rising 1.45%, followed by SMMI.Al, which advanced 1.11%. SMMI.Cu gained 1.04%. SMMI.Sn bucked the trend by shedding 0.83% due to falling LME tin prices and ample supplies of low-priced tin in China’s domestic market.
Last week, China’s March CPI rose by 2.1% on a YoY basis, much higher than expected and helped ease inflationary pressures. Nevertheless, China’s March PPI slowed for a 13th straight month, down 1.9% YoY, which depressed market confidence and pushed the Shanghai Composite Index down to around 2,200. SHFE copper prices rebounded to as high as RMB 55,460/mt, up 2%, but rose slower than LME copper prices. Trading volumes surged initially, but then fell sharply as copper price increases slowed. SHFE copper prices hovered at the 50-day and 10-day moving averages without direction.
Copper prices should continue to hover at current levels in the coming week. Recent US economic data was mixed, but US stocks still climbed steadily over the week, hitting record highs and forcing shorts to close positions. The US dollar index fell to 82, but then stabilized, which will limit LME copper price increases.
According to the CFTC report, net short positions increased to 27,005 lots for the week ending April 2nd, with speculative funds turning pessimistic towards copper prices. In the coming week, LME copper prices should fluctuate within the USD 7,480 -7,650/mt range, but should be more resistant to declines than other base metals.
As China’s economic growth gathers steam and with growing expectations of further RMB appreciation, hot money continues to flow into China, but analysts believe domestic monetary policies will not change significantly during 2Q for a number of reasons. First, neither capital withdrawals nor injections will change monetary policies. Second, new regulations on financial products issued recently by the CBRC had only a modest effect on total financing volumes, although entrusted loans, credit loans and acceptance bills are expected to decrease in the short term. Third, China will not adjust interest rates or the deposit reserve ratio while inflation is mild or while economic trends are not clear. The Shanghai Composite Index is facing a lack of market confidence since stagnating around 2,200. SHFE copper prices are stable for now, but will weaken in the near term to between RMB 54,300 -55,300/mt. As the SHFE copper delivery date nears and the most actively traded contracts change, the price spread between contracts should narrow.
In domestic spot markets, next Monday is the last trading day for SHFE 1304 copper contracts and since SHFE 1304 copper contract prices were RMB 100/mt below SHFE spot-month copper contract prices last Friday, SHFE spot-month copper contract prices will lack upward momentum in the coming week. However, cargo holders will likely cut prices once the shift is made to SHFE 1305. Market players will close positions once copper prices rebound, causing supply to grow. However, downstream orders have been growing steadily since early April as more bargain hunters came into the market. Spot premiums will continue to narrow if cargo holders move goods at higher prices to generate cash, which will also result in SHFE copper prices below spot copper prices.
In China, SHFE 1307 zinc contract prices initially moved higher, but then fell back weighed down below the 20-day moving average. After LME zinc prices rose during the Qingming holiday and with the Shanghai Composite Index moving higher as well, SHFE 1307 zinc contract prices surged to break through the 5-day and 10-day moving averages. However, as LME zinc prices lacked upward momentum and as Shanghai Composite Index lost ground, SHFE zinc prices later fell back to the 5-day and 10-day moving averages.
Measures to combat over-capacity such as developing new applications for aluminum, production cuts at aluminum smelters, accelerating the elimination of outdated capacity, as well as renewed aluminum ingot purchases by the State Reserve Bureau (SRB), are all under consideration. Following the Qingming holiday in China, SHFE 1306 aluminum contract rose from RMB 14,555/mt to RMB 14,790/mt thanks to short-covering, but gains were limited by the lack of long buying. The most active SHFE aluminum contract bucked the trend by rising last Thursday as more shorts exited the market, but later gave back gains as longs took profits at highs. The upside space of SHFE aluminum should be limited due to weak fundamentals.
Spot aluminum prices tracked SHFE aluminum, rising from RMB 14,400/mt to RMB 14,600/mt early last week on stock replenishment following the three-day Chinese public holiday. Nevertheless, higher prices kept downstream producers purchasing only as needed. The fact that SHFE aluminum retreated whenever it approached a high left traders skittish, deflating buying interest later in the week. The eagerness of traders to sell pushed the discount over the SHFE 1304 aluminum contract to RMB 100/mt. Overall trading was thin.
Mixed economic data should keep aluminum prices within tight price ranges in the coming week, with LME aluminum prices hovering near USD 1,900/mt, and with prices for the most active SHFE aluminum contracts struggling at RMB 14,700/mt. Spot aluminum prices are expected to test support at RMB 14,500/mt. Overall trading should be light.
SHFE 1306 lead contract prices held steady with support at RMB 14,350/mt last week, but met resistance at RMB 14,500/mt. SHFE 1306 lead contract prices will likely hover around RMB 14,450/mt this week.
Spot lead was mainly traded last week at RMB 14,150-14,260/mt, with spot discounts of RMB 200-260/mt against the most active SHFE lead contract. Motive battery prices were cut as lead prices fell, but battery consumption was still soft. Lead smelters remained unwilling to sell goods at current low prices. The price cuts by leading motive battery manufacturers and soft battery demand will force manufacturers to focus on selling down existing inventories, curtailing battery output and reducing purchases of lead ingot. Lead smelters may still fulfill long-term contracts, with spot lead prices expected at RMB 14,250-14,400/mt.
In domestic spot markets, spot discounts against SHFE 1306 zinc contract prices on Monday were between RMB 50-70/mt, but were generally between RMB 80-100/mt later in the week. Smelters were holding back goods and keeping quotes higher than market prices, so purchasers were unwilling to buy goods directly from smelters except for long-term contracts. Cargo holders held prices firm as the delivery date neared, with intraday spot prices moving within a narrow band. Spot discounts also remained low, limiting arbitrage opportunities. Downstream buyers purchased goods moderately after the holiday, but turned cautious later in the week, which kept overall transactions muted.
The strengthening US dollar index has given support to zinc prices recently. Given strong growth in exports and investments, China’s 1Q GDP growth due to be released in the coming week is expected to come in at 8%. However, due to sluggish consumption, downstream zinc orders have been poor, so prices will not likely rise in the coming week. Major global economic data to be released this week should expand the zinc price range, with LME zinc prices between USD 1,890-1,950/mt and SHFE 1307 zinc contract prices testing RMB 15,000/mt, with spot discounts against SHFE 1306 zinc contract prices between RMB 60-100/mt.
Spot tin prices in China fell to RMB 148,500-151,000/mt early last week with trading improved but remained little changed in the latter half. Yunxi was traded at RMB 149,000-149,500/mt last Friday, and traded prices of Yunheng were around RMB 149,000/mt. Yunxiang and Kaiyuan were traded at RMB 148,500/mt. Transactions picked up on Monday and Tuesday as buyers replenished stocks at low prices, but trading returned quiet later due to limited orders for downstream enterprises.
On Tuesday, Jinchuan Group cut ex-works prices for refined nickel (large panel) by RMB 1,500/mt, to RMB 113,500/mt, while prices for nickel (small in barrels) were RMB 114,700/mt. In the Shanghai nickel spot market, #1 nickel averaged RMB 113,420/mt, down RMB 1,655/mt from a week earlier. In general, the LME nickel market fluctuated at the low end, so no major changes were seen in China’s domestic nickel markets. Trading among traders was also quiet due to the lack of arbitrage opportunities. Some downstream producers, however, entered the market, believing prices would soon begin to rebound. Bargain hunters were active last week as some believed current prices may have bottomed out, and this aggressive buying will continue into the coming week.