SMM Copper Weekly Price Review and Forecast (1-5 Jul. 2013)

SHANGHAI, Jul. 1 (SMM) –
Review
Last week, LME copper prices continued to move lower. China's liquidity crunch was the focus of markets, increasing market pessimism and pushing down the Shanghai Composite Index to  below 1,900 level, dipping to 1,849, a record low from 4 ½ years ago. Concerns that the liquidity crunch in China will lead to a downturn or stagnation of the Chinese economy pushed capital to the  US dollar as a safe haven, which closed higher over nine consecutive days and moving  towards 83. Gold prices plummeted 5% under strong selling pressure. Many international investment banks lowered expectations for average copper prices this year, which also pushed down LME copper prices from USD 6,836/mt, to USD 6,602/mt, a low from July 2010, or a drop of 1.7%. Total positions exceeded 300,000 lots, a high since March 2010.

The Shanghai Composite Index fell sharply last week, dragging down SHFE copper prices to RMB 47,560/mt, a drop of almost 4% and with a daily fluctuation range of over RMB 1,000/mt. Trading volumes exceeded 1 million lots for three consecutive trading days and grew by over  3 million lots, with total positions increasing by over 20,000 lots. In this context, SHFE copper prices struggled around the 5-day moving average.

Forecast
Copper prices should fluctuate even more this coming week. The US Federal Reserve's Deputy President William Duddley and other two Fed officials' comments that investor expectations were overstated pushed the US dollar index up sharply before falling back on June 27th to around 83. Market fundamentals are now still favorable for the US dollar index, and whether or not non-US dollar currencies rebound, US non-farm employment data and interest rate decisions by many central banks will have a greater influence on copper prices in the coming week.

European Commission (EC) Chairman Manuel Barroso announced the EC and European Parliament had reached an agreement on the 2014-2020 EU budget. The agreement provides “financial support” for the forthcoming discussions of supervision in the banking sector and loss-bearing details following any bankruptcy. Confronted with high unemployment, the  European Central Bank management committee also expressed that central banks will take more aggressive measures, but would be unable to fully resolve the problem, only adding to market apprehension.

LME copper prices should meet resistance at moving averages and lack upward momentum to rise above USD 6,700/mt.

The People's Bank of China suspended open market operations last week. However RMB 25 billion in repurchases coming due still flowed into the market, but was down RMB 3 billion from the previous week. This latest injection, when combined with previous capital, yielded RMB 305 billion in capital injections. As a result, capital prices fell sharply from the previous week's  record highs. The overnight Shanghai Interbank Offered Rate (Shibor) rose slightly by 0.8 basis point, to 5.5610, while other rates fell across the board. Due to a large amount of deposit reserve withdrawals at the beginning of July, the market will likely fall short of capital again in the coming week, but China's central bank stated last Tuesday that it will use open market operations, re-lending, re-discounting, SLO and SLF to adjust liquidity in the banking sector and stabilize money markets. In this context, the Shanghai Composite should continue to fluctuate significantly in the coming week. SHFE copper prices will track LME copper prices, rising to RMB 49,000/mt after stabilizing at RMB 48,000/mt level.