SMM Base Metals Daily Review (2013-8-5)

SHANGHAI, Aug. 6 (SMM) – 

 

SHFE 1311 copper contract opened flat at RMB 50,030/mt on Monday. The most active contract tumbled to RMB 49,920/mt before bouncing back to RMB 50,300/mt as longs entered the market, but then fell back to RMB 50,150/mt due to technical resistance. In the afternoon session, China’s A-shares rallied, helping SHFE copper for November delivery close RMB 150/mt or 0.3% higher at RMB 50,180/mt. Trading volumes and positions decreased by 57,976 lots and 3,256, respectively. SHFE 1311 copper contract is consolidating near the daily moving average.

 

Spot copper in Shanghai was quoted at a premium of RMB 120-380/mt over SHFE 1308 copper contract prices on Monday. Traded prices for standard-quality copper were between RMB 50,800-50,880/mt, and RMB 51,000-51,130/mt for high-quality copper. Rising SHFE copper enabled spot copper holders to hold prices firm. However, premium of standard-quality copper fell due to sluggish consumption. Overall supply was ample, with a variety of brands. Some middlemen bought spot copper while selling SHFE copper, while downstream producers showed little buying interest.

 

SMM survey reveals that 48% of market players surveyed make a bull stand, noting that LME copper may bounce back up to USD 7,080/mt and SHFE copper will continue challenging RMB 50,500/mt this week. The latest US nonfarm payrolls were below expectation, but unemployment rate declined, indicating a continued US recovery. Meanwhile, more capital was flowing into the US equities, helping major indices hit new highs, which will drive up copper prices. In China’s spot copper markets, premiums for high-quality copper were well above those for standard-quality copper due to stronger demand, and most holders of high-quality copper held prices firm, giving support to copper prices. 

 

42% of market players believe LME copper will remain around USD 6,950/mt and SHFE copper may be between RMB 50,000-50,100/mt. The limited releases of economic news will leave market less volatile, and the US dollar also started correction and with its negative correlation with copper prices weakening. Crude oil and gold also meet resistance and mainly hover at high levels. Technically, support for LME copper is strengthening while resistance at the 60-day moving average is evident, preventing prices from swinging largely. On the liquidity front, money rate may fall back following earlier rises as the reverse repos last week boosted market confidence. Bond market may stabilize with trading for short-term products expected to be brisk. In domestic stock markets, despite a larger number of unlocked shares, the total amount remains low this week, with A-shares expected to hold steady, exerting little influence on copper prices. Thus, many investors believe copper prices to remain stable this week.

 

Nevertheless, the remaining 10% of investors are bearish, expecting LME copper to fall below USD 6,900/mt and SHFE copper to test a lower floor at RMB 49,500/mt. The latest CFTC report showed an increase of nearly 10,000 lots in net short positions to 31,094 lots. In spot copper markets, the weakening China’s HSBC PMI and GDP data revealed the tough conditions for SMEs, while industrial power consumption also presented steep falls, combined with softening consumption in the low demand season, most downstream buyers are reluctant to purchase after prices rise above RMB 50,000/mt. As such, a few market players believe copper prices will be dragged down this week. 

 

SHFE 1310 aluminum contract was stagnant after opening slightly higher at RMB 14,260/mt on Monday. In the afternoon session, the most active contract slipped before closing at RMB 14,240/mt, down RMB 10/mt or 0.07%. Mixed economic data will leave SHFE aluminum for October delivery hovering around RMB 14,250/mt for the near term.   

 

Mainstream traded prices for spot aluminum in Shanghai were RMB 14,270-14,280/m t on Monday. Low-iron aluminum was traded around RMB 14,430/mt. SHFE 1310 aluminum contract was mired, while SHFE 1308 aluminum contract met strong resistance at RMB 14,300/mt, dampening sentiment in spot market. Wait-and-see mood permeated, leaving traded prices stagnant at RMB 14,270/mt. In the afternoon, quotations were seen at RMB 14,265-14,270/mt in spot market, but trading was muted.  

 

SMM surveyed 32 domestic aluminum ingot producers and traders.

 

An overwhelming majority (78%) of market players expect aluminum prices to hold stable this week. On the one hand, uncertain US economic recovery will raise anticipation that the US Federal Reserve will not taper off QE3 anytime soon. A weaker US dollar will also lend support to base metals prices. On the other hand, any upside space will be constrained by weak demand from the world’s largest metal consumer. As such, LME aluminum will hover around USD 1,800/mt, while the most active SHFE aluminum contract will move within RMB 14,200-14,300/mt.  In spot markets, consumption will be sluggish due to the seasonal low-demand period. Spot aluminum prices are expected to hold level with SHFE 1308 aluminum contract,  meeting resistance at RMB 14,300/mt but finding support at RMB 14,250/mt.

 

16% of market players anticipate a spike in aluminum prices.  First, the US dollar index failed to break through 82, which will help base metals rally slightly. Second, the central government’s commitment to reining in capacity expansion will boost market confidence. In this context, LME aluminum will rise to challenge resistance at USD 1,850/mt, while the most active SHFE aluminum contract will try to regain RMB 14,300/mt mark.  In spot markets, cargo holders will hold offers firm, with spot aluminum expected to rise above RMB 14,300/mt. Trading will be limited, though.

 

The remaining 6% are pessimistic over aluminum prices this week. First, although European and US economy has improved recently, global economy is still facing downward risks. Second, growing aluminum inventories in China against the off-season for aluminum consumption will aggravate oversupply pressure, dragging aluminum prices down. LME aluminum will retreat from USD 1,800/mt, while SHFE 1310 aluminum contract will be vulnerable at RMB 14,200/mt. Spot aluminum will follow falling SHFE aluminum down below RMB 14,250/mt, though support at RMB 14,200/mt will remain.

 

SHFE 1309 lead contract price started Monday higher at RMB 13,890/mt driven by the continuous increase in LME lead, and stood above the 30-day moving average. Prices then moved between RMB 13,900-13,920/mt and finally ended at RMB 13,920/mt, up RMB 55/mt. Settlement price is slightly lower at RMB 13,905/mt. Trading volumes for the most active contract fell 206 lots to 78 lots, while holdings dropped 10 lots to 2,122 lots. The limited economic events this week may leave investors out of the market, with lead prices expected to consolidate. 

 

Spot lead prices in China rose RMB 20/mt on Monday. Quotes for Chihong Zn & Ge was RMB 13,850/mt, with spot discounts of RMB 50/mt against the most active SHFE lead contract price. Resources of Nanfang were offered at RMB 13,820-13,830/mt, while those of Shuikoushan were quoted at RMB 13,810/mt. Hanjiang and Humon’s resources were quoted at RMB 13,790/mt and RMB 13,760/mt, respectively. Quote was RMB 13,720/mt for goods of Jinli, and RMB 13,800/mt for Wanyang. Both traders and downstream buyers purchased as needed due to uncertain outlook, while supplies in spot lead market remained tight. In the afternoon, most sellers were bullish and reluctant to move goods as LME lead prices rose.

 

According to the latest SMM survey of 30 industry insiders, 20% of them are optimistic, believing LME lead will challenge USD 2,175/mt this week. The US ADP employment was reported cheerful last week, but the nonfarm payroll data released last Friday were disappointing, fueling market concerns over US employment recovery. As a result, market predicts the Fed will postpone the tapering of its asset purchases to December, driving the major US stock indices to new highs, while the US dollar fell back down. Technical indicators foreshadow an increase in buying support. In China’s spot markets, the arrival of high demand season for electric vehicle battery is pushing up lead consumption, while lead supplies from smelters further tighten as high input costs and low prices for by-products, such as silver and sulfuric acid, prompted some smelters to continue maintenance cycles. The combination of these factors leads some investors to believe spot prices will rise to RMB 13,750-13,900/mt this week. 

 

67% of market players are cautious, expecting LME tin to hover at USD 2,100/mt. The mixed economic figures and the limited risky events this week may keep investors on the sidelines. With respect to market fundamentals, LME lead stocks continue to hover at 200,000 mt, and canceled warrant ratio for LME lead also remained little changed at 53-54%. Besides, some market players hold that prices will unlikely show sharp movements following the 5.5% surge last week. In spot lead markets, supplies are limited, prompting cargo holders to hold prices firm. But downstream buyers are reluctant to purchase due to rising prices. Thus, most industry insiders believe spot lead will still be traded at RMB 13,700-13,850/mt this week, with a discount of RMB 50/mt against the most active SHFE lead contact price.

 

The remaining 13% market players are pessimistic, noting that the US unemployment will be difficult to drop to the 7.0% target despite a real recovery in economy. In China, the emphasis on maintaining the bottom line growth and economic restructuring may threaten to curtail base metal demand in the short term. Meanwhile, the lack of upward momentum in LME lead markets revealed by technical indicators and the stagnant euro may possibly cause LME lead prices to slip below USD 2,100/mt and move around USD 2,070/mt. Spot lead prices are believed to be more resistant to declines and to edge lower to RMB 13,650-13,750/mt.

 

SHFE 1311 zinc contract prices opened higher at RMB 14,575/mt as LME zinc prices last Friday closed with gains. China's A-shares opened low but moved higher, closing the day with gains of 1.04%, supporting SHFE zinc prices to hover around RMB 14,590/mt. As a large number of longs entered the market at the end of trading, SHFE zinc price broke through the 20 and 60-day moving average, touching RMB 14,620/mt, and closing at RMB 14,615/mt, up RMB 85/mt or 0.58%. Trading volumes increased by 4,910 lots, to 32,858 lots, and total positions decreased by 2,568 lots, to 132,248 lots.

 

#0 zinc prices were between RMB 14,730-14,760/mt, with spot premiums of RMB 150-180/mt against SHFE 1311 zinc contract prices. #1 zinc prices were between RMB 14,700-14,710/mt. SHFE zinc prices opened high then leveled out, with spot premiums narrowing by RMB 10/mt. Smelters maintained supply, but some still held onto their goods. Traders lacked arbitrage opportunities, and downstream buyers purchased as needed, leaving transactions quiet. Discounts in Guangdong were RMB 200/mt against Shanghai, squeezing market shares of Fujian and Wenzhou.

 

Zinc prices bottomed out then rose last week. Will zinc prices continue to rebound this week?

 

The latest SMM survey shows 60% market players are neutral towards zinc prices this week, believing LME zinc prices will move between USD 1,850-1,880/mt, and SHFE 1311 zinc contract prices will hover between RMB 14,450-14,650/mt, with spot premiums narrowing to RMB 150/mt as the delivery date nears. Little news will be released this week. LME and SHFE zinc prices will resist both increases and declines, with LME zinc prices finding strong support at USD 1,850/mt.

 

Despite the low demand season for zinc, the galvanizing steel market has been brisk over the past three weeks, with galvanizing steel plants continuing to raise ex-works prices. But as costs of galvanized products for traders increase, downstream buyers did not accept high-price resources, which will weigh on zinc price.

 

30% are bullish towards zinc prices, believing LME zinc prices will soar to USD 1,900/mt, and SHFE 1311 zinc contract prices will challenge RMB 14,700-14,800/mt, with spot premiums narrowing to RMB 130-150/mt. Other economic news from Europe is expected to be positive, which will give support to commodity prices. Reserve Bank of Australia and Bank of Japan will announce their benchmark rates this week, with the market expecting the Reserve Bank of Australia will lower interest rates. The market will continue to absorb the disappointing US July non-farm payrolls released last Friday. Decreasing expectations over an end to QE3 will support zinc prices, which, when combined Goldman Sachs's optimistic statement towards zinc prices, will boost investor confidence.

 

SHFE zinc inventories fell by 7,969 mt, to 261,341 mt last week. Total inventories in Shanghai, Tianjin and Guangdong continued to fall, and when combined with cargo holders holding prices firm over the past week, spot premiums were at one point pushed up to RMB 200/mt. That shows zinc supply pressure weakened, which will positively affect zinc prices.

 

The remaining 10% believe LME zinc prices will fall back below USD 1,850/mt, and SHFE 1311 zinc contract prices will fall to test RMB 14,400/mt, with spot premiums remaining around RMB 200/mt. Bank of England (BOE) announced to maintain existing monetary policies, and it will release inflation data this Wednesday. Any sign of tightening monetary policies due to improving economy will weigh on zinc prices.

 

Last Friday, China's central bank released 2Q Monetary Policy Implementation Report, stating it will restrain loans for polluting and energy-intensive industries, which include zinc oxide, galvanizing and zinc alloy industries. Besides, only a small number of zinc smelters conducted maintenance for now, and zinc output will unlikely fall sharply in July. This, when combined with cash tightness, will push down zinc prices.

 

Mainstream traded prices in Shanghai tin market were RMB 140,000-141,000/mt on Monday morning, with a few goods of Yunnan Tin Group traded higher at RMB 141,500/mt. Smelters further raised quotes, but trading was not brisk. In the afternoon, quotes for some non-leading brands fell, with traded prices down to RMB 139,700/mt, but prices for most resources remained stable.

 

According to SMM survey, 45% of market players believe tin prices will rise this week due to bullish mood toward LME tin. Most of them expect tin prices will increase in the first half of the week with spot tin prices driven up by the strong trend of LME tin prices and leading smelters holding ex-works prices firm. However, spot prices are expected to hold steady or edge lower later this week. 

 

30% of investors surveyed by SMM expect spot tin prices to fall this week, with LME tin meeting resistance at the USD 21,000/mt. These investors note that the weak consumption will push down domestic tin prices should LME tin prices fail to break through USD 21,000/mt. In addition, as non-leading smelters have been refraining from selling last week when prices rise, their selling interest may be stronger once LME tin prices stopped rising, and prices will then face downside risk given increasing supplies. 

 

The remaining 25% of market players believe tin prices will stabilize this week, noting that the low selling interest of smelters may help support spot tin prices, although LME tin prices are confronted with the risk of a pullback. These investors believe the limited supplies will keep prices stable as long as LME tin shows no significant declines this week.

 

In Shanghai, transactions were still muted and mainly made among traders. Jinchuan raised nickel prices by RMB 500/mt, up from RMB 98,000/mt, to RMB 98,500/mt, but did not boost the market significantly. #1 nickel prices were between RMB 97,300-98,400/mt in the morning, and remained between RMB 97,300-98,400/mt in the afternoon.

 

SMM surveyed 36 market players and found that 50% believe LME nickel prices will continue to hover between RMB 13,800-14,000/mt. The market will lack macroeconomic news this week, and downstream demand did not improve.

 

28% believe LME nickel prices will rise to RMB 14,000-14,400/mt. The market is expecting the US Federal Reserve (Fed) will resume QE3 due to the worse-than-expected non-farm employment data. Fed believes European Central Bank should implement quantitative easing policies, and Draghi also hinted the central bank will likely use easing monetary policy. Stainless steel plants continue to raise NPI price-to-factory, while rising nickel ore prices boosted stainless steel prices, which will lend support to LME nickel prices.

 

22% believe LME nickel prices will fall back to USD 13,500/mt. LME nickel inventories continued to hit record highs last week, and stainless steel plants are likely to suspend production in the low demand season for stainless steel. Besides, new RKEF NPI capacities will continue to squeeze market shares of refined nickel. As such, LME nickel prices are not optimistic.