SMM Base Metals Daily Review (2013-6-17)

SHANGHAI, Jun. 18 (SMM) –

Copper
With LME copper stagnant overnight, SHFE 1310 copper contract started only RMB 60/mt higher at RMB 51,550/mt on Monday. After its opening, the most active SHFE copper contract was pushed up to an intraday high of RMB 51,960/mt by rising LME copper before falling back to RMB 51,500/mt. Finally, SHFE copper for October delivery closed the session at RMB 51,710/mt, up RMB 220/mt or 0.43%. Trading volumes were off 59,824 lots, and positions also shrank 15,654 lots. Investors generally liquidated positions against rising SHFE copper. The most active SHFE copper contract has found strong support at RMB 51,500/mt, but will face resistance at the 5-day moving average.
 
Spot copper in Shanghai was offered at a discount of RMB 100-280/mt over SHFE 1306 copper contract prices on Monday. Traded prices for standard-quality copper were between RMB 52,280-52,480/mt, and RMB 52,380-52,580/mt for high-quality copper. SHFE copper contract prices were staying at high levels. Holders of imported copper became more interested in selling against rising SHFE/LME copper price ratio. The price gap between SHFE 1306 and 1307 copper contracts expanded to above RMB 400/mt now that SHFE 1307 copper contracts will turn into the new current-month contract tomorrow. As a consequence, spot copper suppliers rushed to move goods, widening spot discount. A few middlemen entered the market in the morning, but downstream producers held to the sidelines, keeping transactions limited. In the afternoon, discounts of spot copper narrowed to RMB 50-180/mt, and traded prices fell to RMB 52,200-52,450/mt, but actual transactions were limited.
 
According to the latest SMM survey, 53% of market players believe copper prices will fall back this week to USD 7,000/mt, and SHFE copper will drop below RMB 51,000/mt. CFTC report showed net short position for copper surged 9,945 lots to 18,047 lots as of the week ending June 11 with its outlook for copper prices turning bearish. In addition, qualified traders are reportedly allowed to continue applying for three-month central bank bills this week. Interbank market started to see tighter liquidity since the Chinese Dragon Boat Festival, with repurchase rates rising, and the People’s Bank of China suspended operation in the open market in the first week after the holiday. Although a net RMB 92 billion has been injected in the market during last week, liquidity was not slackened and should remain relatively tight this week. Besides, most domestic companies will see tight financing at midyear, driving cargo holders to sell goods for cash. That, combined with the pullback in domestic stock markets, will leave investors unwilling to enter stock and futures market, pushing down copper prices.
 
38% of industry insiders believe copper prices will hold steady this week, with LME copper between USD 7,100-7,200/mt and SHFE copper hovering around RMB 51,500/mt. The Fed’s policy meeting this week will result in big swings in US dollar index, posing resistance to copper price movements, while technical indicators reflected that copper prices will unlikely make a breakthrough in the near term. In addition, gold and crude oil prices remained relatively stable recently, which will also affect copper price trends this week.
 
The remaining 9% industry insiders are optimistic, believing LME copper will rise above USD 7,200/mt and SHFE copper will increase to RMB 52,000/mt. Market focuses on the Fed’s June policy meeting this week, and the FOMC will announce the decision Thursday night Beijing time and Bernanke will convene a press conference later. Although it was reported investors’ opinion will change after the meeting, the Fed’s decision remains uncertain, and market will remain stable if investors believe the Fed will unlikely terminate the easing policy after Bernanke’s remark. In this context, the US dollar will fluctuate down, giving certain support to base metals markets. In China’s spot copper markets, cargo holders may hold quotes high after the shift of the most active SHFE copper contract, while downstream buyers will only watch on the sidelines. As a result, SHFE copper prices will benefit if spot copper is sold at premiums, leaving chance for copper prices to rise.

Aluminum
SHFE 1309 aluminum contract started slightly lower at RMB 14,690/mt on Monday, only touching a high of RMB 14,715/mt. The most active SHFE aluminum contract dipped about one hour before the end of the session due to pressure from shorts, and finally closed down RMB 35/mt or 0.24% at RMB 14,660/mt. Positions were up 796 lots to 44,168 lots. Cloudy economic outlook and weakening demand caused by liquidity crunch at the quarter’s end will prevent SHFE aluminum for September delivery from advancing to above RMB 14,600/mt in the near future.

Mainstream traded prices for spot aluminum in Shanghai were RMB 14,810-14,820/mt on Monday, RMB 20-30/mt higher than SHFE 1306 aluminum contract prices. Low-iron aluminum was traded around RMB 14,950/mt. SHFE 1306 aluminum contract prices inched up, but still met resistance at RMB 14,800/mt. Most cargo holders were in a hurry to sell as the end-of-month and end-of-quarter liquidity crunch bit in, but downstream producers largely held to a wait-and-see stance at the beginning of the new week, keeping a lid on aluminum prices. Trading was modest. In the afternoon, some traders cut offers slightly to RMB 14,800-14,810/mt, but few deals were done.

SMM aluminum price averaged RMB 14,800/mt on Monday, up from last week’s RMB 14,790/mt. A majority of the 34 aluminum ingot producers and traders surveyed by SMM are bearish over this week’s aluminum prices.

An overwhelming majority (62%) of market players expect aluminum prices to fall this week. First, consumption may falter as liquidity crunch is biting in at the end of the first half of the year. Second, commissioning of new aluminum capacity in west China will ease tightness in supply caused by falling inventories and production cuts. Aluminum inventories have been around 1 million mt following the Chinese Dragon Boat Festival, but downstream producers purchased only as needed. Meanwhile, LME aluminum inventories soared to a new record high of 5.28 million mt. Tepid demand at home and abroad will increase oversupply pressure. As such, LME aluminum will drop to USD 1,800/mt, while the most active SHFE aluminum contract will struggle at RMB 14,600/mt. Spot aluminum is expected to test support at RMB 14,700/mt.  

The remaining 38% of market players anticipate little changes in aluminum prices this week. US non-farm payrolls and retail sales in May both beat forecasts, signaling sustained recovery in the US economy. This sent the US dollar index below 80. On the other hand, US industrial output in May was unexpectedly flat with April and missed estimate. Mixed figures added to uncertainty over the US economic recovery. Markets are cautious ahead of Fed policy meeting due June 18-19, keeping commodity prices in tight ranges. In this context, LME aluminum will struggle at USD 1,850/mt, while the most active SHFE aluminum contract will hold stable at RMB 14,600/mt. Spot aluminum prices will stagnate at RMB 14,800/mt.
 
Lead
As LME lead prices closed higher last Friday, SHFE 1306 lead contract price gapped nearly RMB 80/mt higher at RMB 13,880/mt on Monday, breaking above the 20 and 30-day moving averages. Later, demand for spot lead in China remained stable and the Shanghai Composite Index hovered narrowly, combined with LME lead moving around USD 2,120/mt, SHFE lead moved between RMB 13,890-13,900/mt and finally closed at RMB 13,895/mt, up RMB 75/mt. Trading volumes for the most active SHFE lead contract fell 10 lots to 36 lots, and positions remained unchanged at 1,782 lots. Total trading volumes for SHFE lead contracts were down 468 lots to 208 lots and positions increased 20 lots to 6,112 lots. SHFE lead prices are expected to fall back down.
 
Spot lead prices increased RMB 30-50/mt compared with last Friday as SHFE lead prices gapped higher. Chihong Zn & Ge was quoted at RMB 13,950/mt, RMB 50/mt higher than the most active SHFE 1306 lead contract price. Hanjiang and Mengzi were offered at RMB 13,900-13,910/mt. With the year moving ahead halfway, most lead-related enterprises reflected tight finance. Selling interest among lead smelters became higher, but downstream buyers were not willing to purchase at prevailing highs and most were awaiting Fed’s interest rate decision to be released this week. Thus, trading in China’s spot lead market was light in the morning.
 
With respect to lead price trends this week, 20% industry insiders surveyed by SMM are optimistic, believing LME lead price will continue to rise and move around USD 2,150/mt and spot lead prices in China may remain below RMB 14,000/mt despite a slight increase late last week. The continued US recovery offset the negative influence of China’s slowdown, and LME lead inventories fell further to 197,000 mt, a new low since November 2010, with canceled warrant ratio hitting 70%, which indicated improvement in overseas demand. In China, lead smelters are deprived of incentive to maintain production due to low prices and raw material shortage, easing tight supply. Meanwhile, SHFE lead inventories also slipped, combined with sellers holding prices firm, some investors believe lead prices will edge higher this week.
 
Pessimistic investors also account for 20% of those surveyed by SMM. These investors note that China will unlikely continue the high speed growth during the structure transformation, which may curtail base metals demand. Lead-acid battery producers kept cutting prices or raising rebates for distributors due to inventory pressure since early May, and some even cut production to ease the financial strains. These all reflected weak lead demand. Besides, lead market will not enter the traditional high-demand season in the short term, while traders and downstream buyers are reporting tight finance with the year approaching midway. As such, selling interest will be undermined with most buyers purchasing as needed. In addition, the continual recovery in US economy fueled expectation for Fed’s retreat from the QE3, adding to fears in the market and driving down stocks in Asia-Pacific market. Shanghai Composite Index fell 8.6% in June, and Nikki Index crashed 22%, eroding investors’ appetite. In this context, some investors expect LME lead prices to move below USD 2,100/mt this week. In China’s spot lead market, cargo holders may be willing to sell goods to generate cash, with spot lead prices expected at RMB 13,750-13,850/mt.
 
A majority, or 60%, of industry insiders are cautious, saying that market is waiting for the policy decision of the US Fed. Although the US economy is showing improvement, May’s strong nonfarm payrolls will not likely offset negative influence from other fields, in particular potential risk of deflation. Thus, the Fed may not terminate the QE in the short term, and market expects Bernanke remain ambiguous on the issue, leaving the US dollar index vacillating. As a result, most market players believe LME lead prices will hover around USD 2,100/mt. In spot lead market, both suppliers and buyers are staying out of the market, awaiting Fed’s policy decision, with spot lead prices expected at RMB 13,800-13,900/mt.

Zinc
SHFE 1309 zinc contract prices opened RMB 20/mt higher at RMB 14,530/mt, boosted by LME zinc prices. IMF anticipates that the US Federal Reserve will maintain massive assets purchasing plan until at least late 2013, helping ease market concerns and driving shorts out of the market. In this context, SHFE zinc prices rose after opening, encountering resistance at RMB 14,600/mt, touching as high as RMB 14,610/mt, and closing at RMB 14,580/mt, up RMB 70/mt or 0.48%.

Trading volumes of SHFE 1309 zinc contracts decreased by 19,038 lots, to 24,258 lots, and positions decreased by 946 lots to 120,498 lots. Trading volumes of SHFE 1310 zinc contracts decreased by 14,824 lots, to 24,876 lots, and total positions increased by 4,142 lots to 90,822 lots.

SHFE zinc prices soared but met resistance at RMB 14,600/mt. Spot premiums of #0 zinc narrowed to RMB 80-110/mt against SHFE 1309 zinc contract prices, with traded prices between RMB 14,670-14,700/mt, and with prices of imported #0 zinc around RMB 14,650/mt. #1 zinc prices were between RMB 14,630-14,640/mt. market sentiment improved, with short momentum weakening, and cargo holders' willingness to sell goods increased. But downstream buyers and traders remained cautious due to high premiums and cash flow tightness, keeping transactions quiet.

The market was plagued with concerns that the US Federal Reserve will back off QE3 and short momentum, weighing down LME zinc prices below all moving averages. Will zinc prices rebound this week?

A most recent SMM survey shows that 50% market participants believe LME zinc prices should move between USD 1,850-1,880/mt, and SHFE 1309 zinc contract prices will move between RMB 14,500-14,700/mt, with spot premiums between RMB 80-130/mt. The market focuses its attention on the Fed's June policy meeting and Bernanke's statement. The Fed will not change its USD 85 billion/month government bond purchasing plan at the meeting, but any clue when it will scale back debt purchasing will cause the market to fluctuate, with investors standing on the sidelines before the decision. Bank of UK will release its minutes of meeting, and the market will focus its attention on the change of leadership of the bank. The Bank of UK will have no reason to further loosen monetary policy before the release of inflation report early August. SHFE zinc prices are well supported at RMB 14,500/mt, but resistant to both increases and declines.

37% believe LME zinc prices will rise above moving averages, and SHFE 1309 zinc contract prices will rally to RMB 14,800-14,900/mt, with spot premiums narrowing to RMB 50/mt. Reserve Bank of Australia will release its meeting minutes this week. The bank announced it would maintain existing policy unchanged early June, but will likely further loosen its monetary policy. A Euro zone finance minister meeting will be held this Thursday, which is expected to announce some measures to ease the high unemployment rate. In China, operating rates at domestic zinc smelters fell recently, and some large smelters plan to cut or suspend production in June, so operating rates are expected to drop further. This will reduce supply of some brands, and boost zinc prices.

The remaining 13% see zinc prices falling this week, believing LME zinc prices will test USD 1,830/mt after falling below USD 1,850/mt, and SHFE 1309 zinc contract prices will fall further to RMB 14,300/mt once losing RMB 14,500/mt level, with spot premiums expanding to RMB 150/mt. Euro zone and many other European countries will release their June flash PMIs. The data is expected to improve but will barely break through 50. Besides, European stocks markets continued to plummet recently, and ZEW June economic sentiment index may distress the market, weighing down base metals prices. China's domestic industry power consumption growth in May slowed MoM, pointing to a downshift in domestic economic growth. HSBC's June PMI for China is expected to fall. Cargo holders' willingness to hold prices firm weakened due to cash flow problem, while downstream buying interest also decreased, weighing down zinc prices.

Tin
Mainstream traded prices for spot tin in Shanghai remained stable at RMB 140,500-142,000/mt on June 18. Most deals for Jiangxi’s brands were made at RMB 140,500/mt, with a few goods quoted at RMB 140,000/mt. Goods from Yunnan Tin Group were traded at RMB 141,500-142,000/mt, and transactions for Jinhai and Yunheng were made at RMB 141,000-141,500/mt. Trading remained light.
 
SMM survey reveals that 85% market players believe spot tin prices will continue to fall this week, possibly below RMB 140,000/mt. LME tin prices stabilized in the past two trading days following the continuous declines during the Chinese Dragon Boat Festival, but resistance at USD 20,500/mt was strong. Technically, LME tin prices will likely fall this week with support at USD 20,000/mt, and may fall further toUSD 19,500/mt should prices dip below USD 20,000/mt. In China, the onset of the traditional low-demand season will leave tin consumption still soft, hurting market confidence and driving down tin prices. Meanwhile, tin smelters are not willing to move goods due to low prices, but the sluggish demand is forcing them to cut prices. In this context, most market players believe spot tin prices will continue to drop this week.
 
The remaining 15% market players believe spot tin price will hold steady this week, noting that LME tin prices stand little chance to break above the current resistance but still find support at USD 20,000/mt. The low selling interest and consumption of low-priced goods will limit the decline in spot tin prices should LME tin prices remain stable. As such, some expect China’s spot tin prices to remain above RMB 140,000/mt this week.

Nickel
In Shanghai, Jinchuan nickel prices were between RMB 102,400-102,600/mt in the morning session, and Russian nickel prices were between RMB 101,400-101,600/mt. Demand remained soft due to the lack of market confidence, despite LME nickel prices were low. Besides, transactions made among traders were also muted as domestic nickel prices fluctuated narrowly.

A most recent SMM survey shows that 50% of market participants believe LME nickel prices will continue to rise to RMB 14,400/mt. It was reported the SRB will purchase about 30,000 mt of nickel in China, and it has purchased 60,000 mt of nickel since the start of this year. SMM confirmed SRB has built stocks by nearly 60,000 mt since Q4 last year, and most of the purchases are Russian and Jinchuan nickel. The purchase will help ease supply surplus. LME nickel prices should continue to rebound in the interim as shorts left the market after profit-taking and since large numbers of longs enter the market.

30% market players believe LME nickel prices will fluctuate between RMB 14,100-14,400/mt. They think whether or not the US Federal Reserve will signal at its policy meeting that they will scale back stimulus will dominate nickel prices in the interim.

20% market participants believe LME nickel prices will fall below USD 14,000/mt. LME nickel inventories grew to a record high of 183,720 mt during the Dragon Boat Festival in China. China's May CPI and PPI both fell short of expectations, and investments, industry production and consumption data were also sluggish, further depressing market sentiment. As a result, the World Bank lowered its outlook for China's economic growth in 2013. Besides, Greek assets auction encountered difficulties, and its government bond yields climbed significantly. Euro zone data released recently remained sluggish, with concerns over an end to QE3 overshadow the market. In this context, a plummeting US dollar index will be unable to boost base metals prices. Some investors believe LME nickel prices will fall to as low as USD 13,500/mt this year.