SHANGHAI, Jun. 9 (SMM) –May’s manufacturing data for major economies were all reported weak, and the US ADP employment was also missed market forecast, hurting confidence in global market and sending the US and European equities down. However, the negative economic data eased market concerns over Fed’s retreat from the easing policies, driving the US dollar to fall more than 2%, which lent certain support to base metals. SMMI edged up 0.22% during the past week, with SMMI.Al leading the increase by rising 1.36%. Some aluminum producers reportedly planned production cuts due to government taking action to tackle overcapacity. Chalco announced to suspend some 380,000 mt/yr in aluminum-related capacity. Meanwhile, trading inventories for spot aluminum have fallen to nearly 1 million mt, combined with improving consumption boosted by the upcoming Chinese Dragon Boat Festival, aluminum prices kept climbing in the past week. LME nickel prices staged a rebound due to the State Reserve Bureau purchasing refined nickel, with SMMI.Ni rallying 1.24%. SMMI.Pb and SMMI.Zn also increased 0.54% and 0.34% as smelters refrained from selling. The weak LME tin and sluggish demand in domestic market left SMMI.Sn down 1.04%, while copper prices fell after initial rises with SMMI.Cu down 0.14%.
The Shanghai Composite Index plummeted by nearly 4% last week, causing SHFE copper prices to meet resistance at the 60-day moving average, but still allowed the low end of the price range to rise to RMB 52,500/mt. As market sentiment weakened, trading volumes fell by 694,000 lots and total positions contracted by 8,198 lots as the shift was made to SHFE 1310 copper contracts and risk aversion sentiment began growing ahead of the Chinese holiday.
Copper prices are expected to fluctuate significantly in the coming week. The European Central Bank announced it would leave refinancing interest rates at a record low 0.50%, which was in line with market expectations. The ECB also left marginal lending rates unchanged at 1.00% and the deposit reserve ratio at 0.0%. The ECB president also pointed out that the bank lowered its forecasts for euro zone economic growth in 2013 since disappointing economic data over the past months increased beliefs the euro zone will not be able to come out of the current recession by the end of this year. Draghi also expressed the possibility of negative deposit interest rates, causing the euro to surge by 1.2% last Thursday and boosting base metals prices.
The US Labor Department reported that the number of initial jobless claims last week topped expectations, but US non-farm employment data remains unpredictable. The number of US initial jobless claims for the first week of May jumped to 360,000, its largest increase since November 2012, allowing the QE3 issue to continue to dominate markets. The US dollar index dipped to a four-month low, but has little room left to fall. Any gain in the index, however, will dampen copper price increases.
Aluminum inventories in China have dropped to nearly 1 million mt on stable downstream demand in seasonally peak demand period and stock building ahead of the Chinese Drag Boat Festival. A small number of aluminum producers have announced plans to cut capacity in response to the Chinese government’s requirement to tackle severe capacity in the aluminum sector. The Aluminum Corporation of China (Chalco) issued a statement on June 5, saying it had decided on a “flexible” production strategy, which involves a temporary shutdown of production capacity of approximately 380,000 mt of aluminum, taking effect immediately. Planned capacity cuts are limited, however, and without any details on actual production suspensions or halts, so it remains to be seen how much impact production cuts will have on aluminum markets. Aluminum prices over this past week did lead gains among base metals on falling inventories and production cuts.
SHFE 1309 aluminum contracts became the most active one early this week. Prices for the most active SHFE aluminum contracts encountered strong resistance at RMB 15,000/mt, with the high-end price at only RMB 14,975/mt as longs closed positions at highs, but did find strong support at RMB 14,900/mt on positive market fundamentals. SHFE aluminum for September delivery hovered near the 5-day moving average for the remainder of the week due to sluggishness in other base metals and as investors exited the market to avoid risks prior to the three-day Chinese holiday.
Mainstream traded prices of spot aluminum in Shanghai rose from last Friday’s RMB 14,720/mt to RMB 14,930/mt on Thursday, a gain of over RMB 200/mt. Guangdong also saw mainstream traded prices surge RMB 330/mt from last Friday to RMB 15,260/mt this Thursday. The more than RMB 300/mt in price gap between Guangdong and Shanghai enticed some traders to arbitrage between these two regions. Spot aluminum supply in south China remained tight, though, as seven days are needed to for delivery to the region and since demand for restocking was growing ahead of the three-day public holiday in China. Improving consumption and tight supply are the major reasons behind the significant uptick in aluminum prices. However, most traders are cautious about future prices as any change in inventories will have a direct effect on aluminum prices.
In the coming week, LME aluminum prices are expected to move within a USD 1,920-1,980/mt price range, with prices for the most active SHFE aluminum contracts testing support at RMB 14,900/mt. Mainstream traded prices for spot aluminum will remain firm at RMB 14,900/mt, with trading expected to be brisk.
The most active SHFE lead contract price rose to RMB 14,195/mt from stronger LME lead prices in the past week, with trading activity also up from a week ago. Some investors booked profits before the upcoming Chinese Dragon Boat Festival. SHFE will be open for only two trading days next week, so SHFE lead prices will be largely influenced by LME lead.
In China, spot lead prices on Monday were around RMB 13,900/mt and downstream demand was up due to pre-holiday stock building. However, downstream buyers turned cautious as prices rose to between RMB 13,950-14,000/mt. Traders were holding limited stocks and saw few opportunities to replenish stocks, leaving trading muted in the latter half of the week. Downstream buyer may increase purchases after the holiday, but smelters are expected to hold prices firm. Supply will increase with the approach of the delivery date, so spot lead prices are expected to hover around RMB 14,000/mt.
SHFE 1309 zinc contract prices struggled around the 60-day moving average, moving in a narrow RMB 170/mt range between RMB 14,800-14,920/mt. Continuously falling domestic stock prices also distressed market sentiment, while large numbers of longs and shorts left the market to avoid risks before the Dragon Boat Festival in China. A falling SHFE/LME zinc price ratio also prompted large numbers of shorts to close positions. By noon on last Friday, positions of SHFE 1309 zinc contract prices shrank by nearly 50,000 lots, with total positions falling by nearly 100,000 lots.
#0 zinc prices were flat at SHFE 1309 zinc contract price levels. Spot zinc prices climbed to a three-month high and gave cargo holders incentives to sell goods, but spot supply shortages persisted since smelters cut output over the past two months. Downstream buying interest was low before the holiday since many enterprises had built stocks at lower prices during May. Since Hanzhong Zinc restarted production and supply of Qinxin, Shuikoushan and Baohui brands were all down, the price spread between Hanzhong and the latter three brands narrowed from RMB 40-50/mt, to RMB 10-20/mt.
There are only two trading days in the coming week. Disappointing May trade data for China announced last Sunday included fixed-assets investments, consumer goods retail sales, industry value-added and CPI figures. Euro zone economic news was also downbeat as well, but May CPI for major economies will become the focus of markets in the coming week, with US non-farm employment data also expected. Sluggish US non-farm employment and other job market indicators will guide monetary policy decisions by the US Federal Reserve and weigh on base metals prices. Upbeat data will enhance expectations that the US Federal Reserve will scale back QE3 stimulus policies, but will also push down zinc prices.
Spot tin prices in China remained low and fell to RMB 141,500-143,500/mt Friday. The pre-holiday replenishments expected ahead of the Chinese Dragon Boat Festival failed to materialize, leaving trading muted. Excess supply and bearishness prevailing in the market drove down prices. Thus, although LME tin prices remained relatively stable, spot tin prices gained little support. Yunnan Tin Group was unwilling to move goods and kept quotes high, but market was little affected.
On Tuesday, Jinchuan Group raised ex-works prices for refined nickel to RMB 106,500/mt (large panel), and RMB 107,700/mt (small in barrel), an increase of RMB 2,000/mt. In the Shanghai nickel spot market, the average price of #1 nickel was RMB 105,900/mt, up RMB 1,360/mt from a week earlier. Trading showed no significant improvements one week ahead of the Chinese Dragon Boat Festival, and deals among traders were also quiet due to a lack of arbitrage opportunities.
In China’s spot markets, trading is expected to quiet this coming week due to the Chinese Dragon Boat Festival. Downstream producers are not expected to replenish goods after the holiday either.