SMM Base Metals Weekly Price Review and Forecast (Oct. 21-25, 2013)

SHANGHAI, Oct. 22 (SMM) – Base metals in China moved in a tight range last week as markets were cautious amid US debt ceiling talks. European and US stocks rebounded markedly and gold prices rallied by 3.2% early last week as economic indicators from China and Germany came in positive and since the deadlock over the US debt ceiling talks began to ease. Base metals, however, rose only marginally. Investors actually pulled out of the market after the US Congress eventually struck a deal to end partial government shutdown and avoid unprecedented debt default. SMMI gained 0.05% last week. SMMI.Cu and SMMI.Zn climbed a mere 0.32% and 0.21%, respectively, as cargo holders were anxious to sell for cash and downstream producers refrained from buying at highs. Spot aluminum prices followed SHFE aluminum down due to growing arrivals after the Chinese National Day holiday, with SMMI.Al down 1.27%. Tin prices also dropped, dragged down by falling LME tin prices and faltering consumption, with SMMI.Sn ending last week 2.45% lower.

Copper
Chinese A shares last week surrendered all gains from a week earlier, depressing any SHFE copper price rise. SHFE copper prices did find buying support at RMB 51,300/mt and staged a strong rally to climb as high as RMB 52,660/mt on Thursday, helped by rising positions and increasing LME copper prices. However, prices met resistance at RMB 52,500/mt with the SHFE/LME copper price ratio falling. Traded volumes for SHFE copper exceeded 400,000 lots, and positions added nearly 10,000 lots.

In the spot market, the price difference between SHFE 1310 and 1311 copper contracts narrowed before the delivery date. After delivery, cargo-holders tried to quote premiums above RMB 100/mt, but ample supply caused premiums to fall. High-quality copper only traded at zero premiums in late week trading, while standard-quality copper was traded at discounts of around RMB 100/mt. In the spot market, traders were bargain hunting, while downstream producers purchased to order, resulting in thin trading.

Aluminum
SHFE 1310 aluminum contract prices rose by RMB 5/mt last Monday before falling by over RMB 200/mt the next day. Prices for SHFE 1311 aluminum contracts, which shifted to the new current-month contracts last Wednesday, were also weak, hovering near RMB 14,440/mt. Falling LME aluminum prices and SHFE current-month aluminum contract prices sent SHFE 1312 aluminum contract prices down below the 5-day and 10-day moving averages to RMB 14,315/mt. Prices for the most active SHFE aluminum contracts ended last week down RMB 100/mt, or 0.69%. 

Spot aluminum prices in east China broke through RMB 14,600/mt last Monday before following SHFE aluminum down RMB 120/mt to RMB 14,440-14,460/mt. Prices in Wuxi were at a considerable discount over SHFE current-month aluminum contracts, while a high premium was reported in Shanghai where supply was tighter. Lower prices failed to stoke much buying interest, though.

Investors will stay cautious due to economic losses caused by the temporary US government shutdown and ahead of the release of US non-farm employment data and manufacturing PMI this week. This will hold LME aluminum prices in check within a USD 1,830-1,880/mt range. With only limited economic results expected to be announced in China, SHFE aluminum prices will track movements of LME aluminum prices, with SHFE 1312 aluminum contract prices expected between RMB 14,300-14,500/mt. SHFE 1401 aluminum contracts may become the most active contract this week.    

Lead
SHFE lead prices, boosted by rising LME lead prices, climbed to RMB 14,400/mt from RMB 14,100/mt, and attempted to push through the 60-day moving average. Positions continued to increase last week, with long investors prevailing in the market. 

In China’s spot market, the average SMM #1 lead price gained only RMB 100/mt last week. However, downstream producers still considered the price unreasonably high and were reluctant to purchase. Spot lead in Shanghai was traded at a discount, but was down from a recent premium of RMB 60-70/mt, allowing arbitrage opportunities and keeping transactions brisk. Lead smelters will still trade aggressively this week since their inventories and output have both risen. Downstream producers, however, will purchase only as needed since spot prices are high, and will unlikely replenish inventories this week, which will keep spot prices subdued. Most market supply will be dominated by non-deliverable goods since widening gap between spot and futures will make it difficult for traders to move deliverable goods. Spot traded prices are expected in RMB 14,150-14,350/mt range this week.   

Zinc
LME zinc prices hovered around USD 1,930/mt last week as US debt ceiling negotiations took center stage. LME zinc prices edged up due to market optimism three weeks ago, but slow progress of the US debt limit negotiations weighed down LME zinc prices early last week. Nevertheless, the US Congress eventually reached an agreement, allowing LME zinc prices to hover between USD 1,925-1,930/mt, and finding solid support from the 5 and 10-day moving averages.

SHFE 1401 zinc contract prices moved between RMB 14,890-15,000/mt, meeting resistance at RMB 15,000/mt, and with a cautious sentiment prevailing in the market. Total positions were down by 15,904 lots, while SHFE zinc warrants decreased by 1,338 mt, to 87,759 mt.

Spot premiums for #0 zinc against SHFE 1401 zinc contract prices remained between RMB 100-170/mt, unchanged from two weekends ago. Smelters without strong inventory pressures did not sell goods in large amounts, and other cargo holders were holding prices firm. Downstream buying interest was low at prices above RMB 15,000/mt, leaving transactions muted. #1 zinc prices were impacted by imported zinc prices, with the price spread between SMM #0 and #1 zinc expanding to RMB 100/mt.

Last week, the price spread between Guangdong and Shanghai markets expanded to RMB 130-180/mt. Galvanizers and zinc oxide producers in and around Tianjin did not restart production due to ongoing environmental protection measures during the East Asia Games, leaving zinc demand soft and causing spot premiums for Tianjin against Shanghai to change to  discounts of RMB 40-80/mt.

Now that the US Congress has reached an agreement on the debt limit and budget, the US government will reopen. US President Obama stated last Thursday that the financial impasse dragged down US economy over the past weeks, pushing up borrowing costs and the US fiscal deficit, so some market players anticipate that QE3 will remain in place until later this year or early next year. US Labor Department announced that US non-farm employment data in September will be released this Tuesday, adding to market uncertainties over QE3 implementation. The US government will release September existing home sales, September new home sales, Markit's flash manufacturing PMI for October, and University of Michigan's CCI for October this week, which will guide market movements. Early last week, China's September CPI rose 3.1% YoY, but its PPI in September fell 1.3% YoY. China's 3Q GDP growth released last week was 7.8% YoY, down slightly from the 7.5% 2Q. HSBC's flash October PMI for China will be announced this week, and since markets are optimistic, zinc prices will find solid support. However, markets remain cautious toward QE3 uncertainties, so  LME zinc prices should move between USD 1,890-1,940/mt, meeting strong resistance at USD 1,940/mt. SHFE 1401 zinc contract prices will move between RMB 14,800-15,000/mt, with spot premiums between RMB 100-160/mt.

Tin
Spot tin market in China saw faster declines last week, dampened by slipping LME tin and feeble consumption downstream, with spot prices down to RMB 146,500-150,000/mt last Friday. Spot tin prices came under downward pressure given increasing supplies for the brands of Jiangxi province which were offered at low prices and limited sales. Last Thursday, traders cut quotations several times, driving prices to fall quickly, and leaving prices in Shanghai RMB 1,500-2,000/mt lower than those in Guangdong. Transactions picked up slightly Thursday afternoon, but trading remained muted for the whole week. Tin prices presented the biggest drop among all base metals. 

Nickel
In China’s domestic nickel spot markets, the average price of #1 nickel from 11-17 October was RMB 97,370/mt, up RMB 182.5/mt from a week earlier. Jinchuan Group raised ex-works prices by a total of RMB 700/mt during the week to hit RMB 98,000/mt last week. Traded prices for Jinchuan nickel were between RMB 97,500-98,200/mt, and were RMB 96,500-97,200/mt for Russian nickel, creating a gap of RMB 1,000/mt between the two. Trading was thin, with deals mainly among traders. 

Now that the US debt limit issue has been temporarily resolved, market attention is now shifting to upcoming economic reports. The US will announce non-farm payrolls for September, but the latest disappointing initial jobless claims are casting a shadow over the results. A weak dollar is expected to support LME nickel in the coming week. PMI readings from major economies, as well as HSBC’s China PMI, will be also released in the coming week. LME nickel is expected to move in a USD 150/mt range around the USD 14,000/mt mark.