SHANGHAI, Jun. 3 (SMM) – The US economic data remained positive last week, strengthening market expectation for Fed to wind down QE, but China and euro zone economy continued to show weakness. The US dollar index struggled t 84, limiting increase in commodities prices. Later, however, as the US Q1 GDP was revised downward, and employment rate increased, the US dollar dropped below 83, driving commodities prices to rebound. As a result, base metals prices were mixed last week, with SMMI edging up 0.04%. SMMI.Zn staged the biggest increase of 1.37%, followed by the 0.75% growth in SMMI.Al. LME lead prices rose sharply as LME lead inventories kept falling and proportion of canceled warrants rallied to 77%. Downstream buying interest in China’s lead markets was low although lead smelters held prices firm, leaving SMMI.Pb only edging up 0.54%. As LME tin and nickel prices continued to slip, SMMI.Sn fell 1.03% and SMMI.Ni fell 0.57%. SMMI.Cu inched down 0.33%.
Last week, markets lacked major macroeconomic news, but US economic data was upbeat, triggering expectations that the US Federal Reserve may trim the current QE3 program. In response, US stocks fell initially but later rebounded. The US dollar index fluctuated more widely and broke through 84, but fell back below 83 at the week’s end, dragged down by US jobless claims and downward revision in GDP figures. The IMF lowered its forecast for China’s economic growth, weighing down demand for commodities. The restart of operations at one Indonesian copper mine exacerbated the current surplus of copper, so LME copper prices met resistance at USD 7,380/mt, but found support at USD 7,200/mt, with the proportion of canceled warrants surging to 38%. LME inventories are expected to continue falling, but should give more support to LME copper prices, which are current weak and volatile compared to other base metals.
The Shanghai Composite Index rebounded last week by 1.3%, but failed to help SHFE copper prices, which fell to as low as RMB 51,790/mt after SHFE copper prices lost 1%. Trading volumes grew to nearly 300,000 lots and total positions surged by nearly 20,000 lots by the end of the week.
Most aluminum smelters completed aluminum ingot shipments to State Reserve Bureau warehouses in late May. Consumption improved during 2Q 2013 due to a seasonal peak-demand period, although only marginally. Sharp declines in arrivals caused aluminum inventories in May to drop by 190,000 mt to 1.08 million mt, and although this level is still considered high, goods available in the market were limited, sending spot aluminum prices higher. LME aluminum inventories in late May hit 5.21 million mt, up over 50,000 mt from early May. This kept LME aluminum prices in check. As such, the SHFE/LME aluminum price ratio is now approaching 8.
Spot aluminum prices found support at RMB 14,600/mt early last week due to falling inventories, and rose further to challenge RMB 14,700/mt later in the week, tracking SHFE aluminum. Although downstream buyers refrained from buying at highs as month-end liquidity crunch bit in, but traders still held offers firm, with discount at RMB 20-50/mt. Small price gap between SHFE aluminum and spot aluminum in Shanghai left little room for arbitrage, keeping spot aluminum supply there in surplus. As a result, prices in Shanghai gained less than in Wuxi and Hangzhou.
In the coming week, LME aluminum prices are expected to struggle at USD 1,900/mt, while prices for the most active SHFE aluminum contracts will test support at RMB 14,700/mt. Spot aluminum prices will challenge RMB 14,800/mt, with trading expected to pick up slightly.
SHFE 1307 lead contract became the most active contracts, and its price rose by 1.5% from RMB 13,850/mt to around RMB 14,000/mt. SHFE lead prices may test RMB 14,000/mt this week due to influence from LME lead prices and the Shanghai Composite Index, which is currently above 2,300.
Traded prices in China’s spot lead markets remained between RMB 13,780-13,840/mt last week, with spot discounts of RMB 50/mt against the most active SHFE lead contract price. Downstream buyers were unwilling to purchase but smelters still became bullish due to rising LME lead prices. Smelters held prices high, but trading was muted. Selling interest in China’s spot lead markets may rise this week with financing pressure easing at the beginning of the month and due to rallies in lead prices. Some downstream buyers will replenish stocks ahead of the Chinese Dragon Boat Festival. Smelters, especially medium-size, will be more active selling goods due to rising lead prices, with spot lead prices expected at RMB 13,800-13,950/mt.Zinc
Last week, the LME market was closed on Monday due to a UK bank holiday, but LME zinc prices led increases of all base metals, rising to the 30-day moving average and challenging the 60-day moving average. Bank of Japan officials expressed support for easing policies despite the recent decline in the Nikkei Index. It was reported that Japanese Prime Minister Shinzo Abe may announce additional structural reform plans in early June, so stock price declines did not weigh down base metals. The number of US initial jobless claims last week reached 354,000, with an average increase over the past four weeks of 6,750. US 1Q GDP was revised downward by 0.1% to 2.4%, helping ease concerns that the US Federal Reserve will reduce QE3, but pushed down the US dollar index to the 60-day moving average. In response, LME zinc prices extended gains and broke through the 60-day moving average and the USD 1,900/mt level, briefly hitting USD 1,920.5/mt.
SHFE 1309 zinc contract prices also pointed toward the 60-day moving average. Margins at scale-efficiency industry enterprises rose in April by 9.3% YoY, helping ease disappointment from the decline in HSBC’s May PMI for China. The Shanghai Composite Index soared immediately on opening and SHFE 1309 zinc contract prices broke through the 5-day and 30-day moving averages. Active long positions also pushed prices toward the 60-day moving average, but later met resistance due to the weakening copper prices and falling domestic stock markets.
As an increasing number of smelters suspended production, cargo holders held prices firm later in the week, pushing spot premiums for #0 zinc against SHFE three-month zinc contract prices to between RMB 30-60/mt. However, traders began increasing supply later in the week due to month-end cash flow problems. As SHFE zinc prices strengthened, spot discounts for #0 zinc against SHFE three-month zinc contract prices were down to RMB 0-30/mt, but downstream buying interest was still low, keeping transactions muted. Downstream buyers in Fujian province shifted supply sources to Guangdong province due to a price spread of RMB 100-120/mt between Guangdong and Shanghai, while the price spread between Tianjin and Shanghai also narrowed from RMB 190-200/mt early last week to RMB 60-80/mt. Prices for Tianjin Zijin brand were as much as RMB 90/mt below Shanghai Shuangyan by the week’s end due to increasing supply and soft downstream demand resulting from environmental protection inspections.
In China’s spot tin market, prices held steady early last week but kept falling due to weak consumption in the latter half of the week, and dropped to RMB 143,500-145,000/mt last Friday. Traded prices for brands in Jiangxi has fallen to RMB 143,200/mt. The downside risk for LME tin and weak demand in China’s domestic spot market caused by poor orders for downstream buyers, combined with increasing supply, pushed spot tin prices to fall faster.
On Tuesday, Jinchuan Group cut ex-works prices for refined nickel to RMB 104,500/mt (large panel), and RMB 105,700/mt (small in barrel), a drop of RMB 2,000/mt and mainly for long-term contracts. In the Shanghai nickel spot market, #1 nickel averaged RMB 104,540/mt, down RMB 650/mt from a week earlier. Facing tight liquidity at the month’s end, downstream producers showed little buying interest, and with a lack of arbitrage trading due to only small price changes, trading among traders was also anemic.
Nickel market fundamentals are weak, so nickel prices will remain soft.