SHANGHAI, Sept. 10 (SMM) – Base metals prices pulled back from high last week. Upbeat China manufacturing PMI fuelled a rally in financial markets early last week, driving base metals prices higher, with copper leading the gains. However, the US dollar index shook off resistance at 82 amid growing worries that the US may take military action on Syria. Investors closed positions in base metals, weighing base metals prices down. SMMI shed 0.56% as a consequence. Lead led the losses among base metals, with SMMI.Pb down 2.22%, followed by 2.02% decline in SMMI.Ni. A 2.7% drop in LME lead and growing supply sent lead prices in China down. LME nickel closed down for a seventh straight trading day and Jinchuan Group cut nickel prices three times to RMB 97,500/mt last week, bringing nickel prices in China down. Copper and aluminum prices proved more resistant to declines, with SMMI.Cu and SMMI.Al down a mere 0.56% and 0.25%, respectively. Tin was the outlier among base metals, with SMMI.Sn up 0.53%. This is because markets are worried that tin supply will tighten after Indonesia restricted refined tin exports from August 30. LME tin broke through USD 22,000/mt as a result. Cargo holders in China held back goods out of growing optimism over future prices and traders stepped up stock replenishment, pushing tin prices up.
Last week, LME copper prices rose as high as USD 7,300/mt due to upbeat manufacturing PMI from China, but due to growing market concerns of a likely US attack on Syria, the US dollar index rebounded to 82.65, which pushed LME copper prices to USD 7,083/mt, a drop of 2.5%, and later met resistance at the 30-day moving average.
SHFE copper prices fell in tandem with LME copper prices, but a rebounding Shanghai Composite Index lent some support to SHFE copper prices, allowing the SHFE/LME copper price ratio to rise to 7.24. SHFE copper prices fell last Wednesday, and at RMB 51,500/mt, SHFE prices found support at the 30-day moving average and limited losses to 1.5%. Trading volumes of SHFE 1302 copper contracts increased by over 75,000 lots, and total positions increased by over 7,400 lots. Total trading volumes of SHFE copper contracts grew by 95,000 lots last week, with total positions above 9,800 lots. SHFE copper prices were more resistant to declines than LME copper, but gains were also limited.
Copper prices are expected to consolidate this week. Recent economic indicators continue to show a steady US economic recovery, a stable euro zone economy, and a Chinese economy under transition. The World Bank estimates the US economy will grow by 2% this year and 2.8% next year, and with the euro zone economy expected to post 0.9% growth next year. Although China's economic growth this year will slow to 7.6%, it will transit to a more sustainable development model, which will limit global economic growth globally. If the latest US non-farm employment report is positive, the US dollar index, as well financial markets and copper prices, will all rise. However, market fears of an early end to QE3 will also grow, prompting investors to trade more aggressively.
This week, LME copper prices will find strong support at the 60-day moving average and at USD 7,030/mt. A rising SHFE/LME copper price ratio is now more favorable for traders to place orders, which will in turn support copper prices, with LME copper prices moving between USD 7,030 -7,270/mt.
The People's Bank of China (PBOC) executed 14-day reverse repurchases totaling RMB 10 billion on September 5th, down from RMB 26 billion from a week earlier and with the bidding rate remaining at 4.1%. Interbank capital movements slowed, so interest rates in September are expected to move higher. Capital will be sufficient during the first half of September, but contract sharply in the latter half of the month. This week markets will see the issue of Chinese three-year Central Bank Bills, which will pull liquidity from the market. Investor attitudes will be mixed, with SHFE copper prices expected between RMB 51,200 -52,500/mt.
Investors turned to the US dollar as a safe haven amid growing worries over a possible attack on Syria by the US military forces, and positive US economic and employment data added to expectations of an early exit from QE3 by the US Federal Reserve, helping drive up the US dollar index above 82.5 last Thursday. In response, LME aluminum prices fell to USD 1,785/mt last Wednesday from USD 1,950/mt, while SHFE 1312 aluminum contract prices also fell to their lowest level since early August at RMB 14,160/mt last Thursday. In China’s spot markets, spot aluminum prices in east China followed SHFE aluminum prices lower, but tight supply allowed cargo holders to demand backwardation over SHFE 1309 aluminum contract prices, with a backwardation of RMB 40/mt reported in Shanghai last Thursday.
The US dollar should remain strong given the ongoing Syrian crisis. In the coming week, LME aluminum prices may fall to their lowest level for the year at USD 1,758/mt, and likely move within a USD 1,760-1,820/mt range. SHFE 1312 aluminum contract prices should fluctuate between RMB 14,100-14,200/mt. In spot markets, shipments of aluminum ingots will not increase sharply, which will allow cargo holders to hold prices firm. A backwardation of RMB 10-50/mt is expected over SHFE 1309 aluminum contract prices. Trading will be modest.
Although the smaller lot size for SHFE lead contracts took effect last week, SHFE lead prices gained little momentum, dropping instead from RMB 14,650/mt to RMB 14,300/mt. This week, under the influence of LME lead, SHFE lead prices may find support at RMB 14,140/mt, which is the current 60-day moving average, but will hit resistance at RMB 14,350/mt.
Spot lead prices in China were RMB 14,550-14,650/mt early last week, but fell sharply to RMB 14,350-14,450/mt. Premiums for spot lead over the most active SHFE lead contract price rose from RMB 50/mt to RMB 100/mt. Bearish cargo holders moved goods actively, but downstream buyers were reluctant to purchase, leaving transactions quiet. The price gap between spot and SHFE lead may narrow with the approach of the delivery date, while spot lead prices this week are expected to move between RMB 14,150-14,350/mt. Goods holders will still move goods aggressively to minimize financial risks, but downstream enterprises may also replenish stocks at low prices now that existing inventories have been consumed. As a result, trading in spot lead markets should improve.
Last week, the US dollar index climbed due to an escalation of the Syrian crisis and from growing speculations that the US Federal Reserve (Fed) will soon wind up its asset purchasing program. These concerns are also weighing down zinc prices. LME zinc prices briefly tested USD 1,900/mt, but then fell back below the 60-day moving average.
SHFE 1312 zinc contract prices continued to fall over three days due to growing short momentum, with prices dragged down by LME zinc prices and dipping to RMB 14,700/mt, rolling back gains from mid-August. Trading volumes were down by 16,730 lots, but total positions grew by 21,136 lots.
In China's spot markets, spot zinc prices fell along with SHFE zinc prices, but declines were greater than losses for SHFE zinc prices. Spot premiums for #0 zinc against SHFE 1312 zinc contract prices remained between RMB 30-50/mt, with traded prices falling below RMB 14,800/mt. Smelters were distressed, but traders were actively moving goods, and when combined with large amounts of imported zinc arrivals, market supply was considered sufficient. Due to credit issues, traders were operating cautiously and some enterprises stayed on the sidelines busy chasing payments, which left transactions muted. Downstream orders were limited.
Output from Zijin Mining was negatively affected due to production line interruptions, which led to a slightly contracted supply. Bailing and Hongye were also conducting maintenance and holding back goods. As a result, spot supply in Tianjin was tightening, but gave support to zinc prices, with spot premiums of regular zinc against Shanghai expanding to RMB 80/mt.
This coming week the market will focus on economic data from China and US, as well as the Syrian situation. Positive US non-farm employment data will point to a continued US economic recovery, but also deepen expectations that the Fed will begin to wind down QE3 in September, which will further weigh on zinc prices. Statements this week from US Federal Reserve officials should give some clues as to the timing of QE3 tapering, but any decision on a possible military attack on Syria will not be made. The United Nations plans to complete its chemical weapon report for Syria before September 18th, but the US government may decide to attack before then.
Last week, LME zinc inventories fell below 1 million mt, a record low last seen on 9 October 2012, and low stocks will give support to zinc prices. Zinc prices have been falling for two consecutive weeks, rolling back gains from mid and late August. LME zinc prices are not expected to fall sharply this week, but test support at USD 1,850/mt. Markets will not attract large numbers of investors before the Syrian situation becomes clearer, with LME zinc prices meeting resistance at the 60-day moving average.
SHFE 1312 zinc contract prices will move lower, dragged down by LME zinc prices, but declines will be limited, with prices moving between RMB 14,500-14,800/mt. Smelters that depleted inventories in mid and late August will now hold onto goods due to falling zinc prices, but as demand for zinc improves, spot premiums for #0 zinc against SHFE1312 zinc contract prices should grow to RMB 50-100/mt.
In China’s spot tin market, prices fell early last week and hit as low as RMB 140,000/mt due to increasing supplies for cheap resources. However, spot prices rose significantly last Thursday from RMB 140,500/mt to RMB 142,000-145,000/mt, boosted by rising LME tin and smelters’ reluctance to sell goods. Most traders refused to make quotations, waiting for further guides of LME tin, leaving strong bullish mood in the market. Transactions between traders were enlivened, and some downstream buyers were also inclined to restock Thursday afternoon.
In China’s domestic spot markets, the average price for #1 nickel from 30 August to 5 September was RMB 97,440/mt, down RMB 4,060/mt from a week earlier. Jinchuan Group cut ex-works prices by a total of RMB 3,700/mt last week, to RMB 97,500/mt. Traded prices for Jinchuan nickel were between RMB 97,100-99,700/mt, and RMB 96,000-98,500/mt for Russian nickel, resulting in a gap of RMB 1,000-1,200/mt. Downstream producers took an as-needed approach towards raw material purchases, with most deals made among traders.
The LME nickel market currently lacks upward momentum. Any impact from the US non-farm employment report is expected limited, and markets have already digested the influence of any potential tapering of US stimulus programs, so upcoming August trade data from China will become a major influence on nickel prices. In the coming week, LME nickel prices are expected to move between USD 13,700-14,200/mt, and domestic spot nickel prices will hover between RMB 98,500-100,000/mt.