SHANGHAI, Jun. 24 (SMM) – The Fed announced to start winding down asset purchasing later this year, with the US dollar soaring 1.7% and gold plunging 7.14%. Commodities prices fell across the board with LME copper prices dipping as low as USD 6,696/mt. HSBC China manufacturing PMI hit a 9-month low, driving domestic A-shares to slump over 4% and base metals to drop 3-6.9%. Market was dominated by shorts. SMMI fell sharply by 3.55%, with SMMI.Cu falling 4.68%. The tight cash flow caused cargo holders to sell goods actively, leaving copper supply ample, but downstream buyers only purchased as needed. SMMI.Ni also fell 4.55% with traded prices in China slipping below RMB 100,000/mt. As LME nickel prices kept hitting new lows, Jinchuan Group cut ex-works prices RMB 4,500/mt early last week. SMMI.Pb only edged lower 0.54% since well-known smelters held prices firm.
Last week, LME copper prices moved lower as the US Federal Reserve announced it was keeping interest rates unchanged and would scale back its debt purchasing at the end of this year. Major US economic figures, including housing figures and construction permits, fell short of expectations. The IMF lowered its expectations for global economic growth in 2014, and the US dollar index to surge by 1.7%, to 82, while gold prices fell by 7.14%. US stock and commodity prices fell, with LME copper prices falling sharply from USD 7,200/mt, to USD 6,697/mt, a record low over the past 20 months, and with a weekly drop of 7%. Total positions and trading volumes were both down as well.
HSBC’s PMI for China hit a 9-month low and China’s power consumption fell sharply in May on a MoM basis, causing the Shanghai Composite Index to fall by 4% to below 2,100. SHFE copper prices continued to open low each day, following LME copper price trends, and falling to RMB 48,390/mt, a weekly decline of 6.9%. Trading volumes surged by 3 million lots and total positions increased by nearly 90,000 lots, with total positions hitting a high of 770,000 lots and short momentum dominating the market.
Traders aggressively sold goods to generate cash at the end of mid-year, but downstream demand was soft, causing aluminum inventories to fall more slowly to around 1 million mt. Prices for the most active SHFE aluminum contracts fell from RMB 14,990/mt to RMB 14,220/mt, their lowest level since June 2010. Shorts pulled out of the market ahead of the weekend, helping SHFE 1310 aluminum contract rebound, but resistance at RMB 14,400/mt remains.
Mainstream traded prices for spot aluminum in Shanghai tumbled from RMB 14,950/mt before the holiday to RMB 14,420/mt immediately afterward, a drop of RMB 530/mt and the lowest since May. Mainstream traded prices in Guangdong also plunged from RMB 14,700/mt to RMB 15,340/mt, a decline of RMB 640/mt and the lowest since May 20. Prices in Guangdong were RMB 400/mt higher than in Shanghai before the Chinese Dragon Boat Festival, stimulating aluminum smelters and some traders in east China to ship goods to Guangdong, causing inventories in the region to grow. The price spread between both regions, however, narrowed to RMB 250/mt after the holiday due to growing inventories in Guangdong. Cargo holders rushed to liquidate stocks as cash flows tightened and aluminum prices fell, but downstream producers purchased only as needed, depressing overall trading.
In the coming week, LME aluminum prices are expected to test support at USD 1,800/mt, with prices for the most active SHFE aluminum contracts testing resistance at RMB 14,400/mt. Spot discounts of RMB 50/mt or less are expected over SHFE 1307 aluminum contract prices. Supply will exceed demand and trading should be light.
SHFE 1309 lead contracts became the most actively traded, with prices moving between RMB 14,110-14,170/mt early last week. As LME lead prices declined and the Shanghai Composite Index fell below 2,100, SHFE lead prices, although more resilient than other base metals, still fell below RMB 14,000/mt, or down 1.8%, and was only RMB 20/mt above this year’s lowest level. SHFE 1309 lead contract prices are expected to remain below RMB 14,000/mt this week.
Spot lead prices in China initially held steady at RMB 13,850-13,930/mt, but later fell by RMB 50-70/mt last week. Downstream buyers turned bearish and purchased goods only cautiously. Smelters, especially large-scale ones, increased deliveries for long-term contracts in order to improve cash flows at the month’s end. SMEs increased supply in spot markets, but transactions were limited. Selling interest in China’s spot lead market should rise this coming week due to smelters’ need for cash at the mid-year point, but downstream buyers which are also under growing financial pressure will still likely purchase only according to production needs. Recent declines in base metal prices have left downstream buyers cautious, but traders will be active trying to lower stock levels, pushing spot lead prices down to RMB 13,700-13,850/mt.
Last week, LME zinc prices were pulled down by a series of negative economic news reports, falling below USD 1,850/mt, but still considered more resilient than other base metals. Markets were cautious ahead of the US Federal Reserve’s (Fed) policy meeting, with LME zinc prices fluctuating weakly and finding support at USD 1,850/mt. The Fed maintained its benchmark rate and left the monthly asset purchasing program unchanged, but raised US GDP growth expectations for 2014 to 3.0%-3.5% and lowered the US unemployment rate forecast to 6.5%-6.8%. Fed Chairman Ben Bernanke expressed support for scaling back the QE3 policies, which pushed up the US dollar index and weighed down zinc prices. HSBC’s June PMI for China fell from May, triggering concerns over Chinese zinc demand and increasing selling pressure. In response, LME zinc prices dipped to USD 1,820.5/mt, but rebounded to USD 1,840/mt as a large number of shorts left the market after profit-taking and bargain hunters rushed in.
SHFE 1310 zinc contracts became the most actively traded contracts last week. SHFE zinc prices fluctuated narrowly between RMB 14,500-14,620/mt early in the week, and due to the sluggish China PMI figure for June, the Shanghai Composite Index fell to 2,082.82, its lowest level since December 2012, and down 2.77% in a single day. SHFE zinc prices plunged to RMB 14,255/mt later in the week, but after LME zinc prices stabilized and Chinese stocks markets rallied, some bargain hunters entered the market, pushing up SHFE zinc to RMB 14,400/mt.
In spot markets, premiums for #0 zinc against SHFE 1310 zinc contract prices expanded initially, but later narrowed. Cargo holders held prices firm due to tight supply, causing spot premiums to grow from RMB 50-80/mt to RMB 100/mt. As cargo holders increased supply to generate cash, spot premiums then contracted to RMB 60-90/mt. Faced with cash flow problems, smelters and traders were also forced to increase goods supply, and when combined with increased goods delivery, spot supply and imported zinc supply were also ample. However, downstream buyers turned cautious and kept inventories low due to market pessimism and a lack of orders, causing spot zinc prices to fall with SHFE zinc prices.
Spot tin prices in China continued to fall due to falling LME tin prices and Bernanke’s remark about QE, and declined RMB 1,000/mt to RMB 138,500-140,500/mt last Friday. Cargo holders actively sold goods at low prices, while downstream buyers still purchased as needed, combined with the onset of low-demand season, leaving both prices and trading volumes down. Several well-known producers cut ex-works prices, with only quotes of Yunnan Tin Group holding firm, but consumption remained soft.
On Tuesday, Jinchuan Group cut ex-works prices for refined nickel to RMB 102,000/mt (large panel), and to RMB 103,200/mt (small in barrel), both down RMB 4,500/mt. In the Shanghai nickel spot market, #1 nickel averaged RMB 99,480/mt, down RMB 2,370/mt from a week earlier. Spot nickel prices retreated below RMB 100,000/mt in response to sharp declines in electronic traded prices. The price quoted by Jinchuan Group on Thursday was RMB 99,000/mt, and was the first time since April 2009 that Jinchuan nickel prices were below RMB 100,000/mt. At that time, LME nickel prices were around USD 10,900/mt, but current LME nickel prices are around USD 14,000/mt, and would indicate that China’s domestic nickel prices are feeling the effect of a long-term supply surplus and NPI market. Continuous price declines left downstream producers on the sidelines last week, but arbitrage opportunities in electronic trading markets still provided trading opportunities. Overall trading was still quiet, however.
Russian nickel will be preferred by markets due to its price advantage. Once prices fell below RMB 100,000/mt, bearish sentiment dominated markets, with prices expected to remain weak in the coming week.