SHANGHAI, Nov. 11 (SMM) – US manufacturing PMI and Q3 GDP came in positive, rekindling concerns that the US Federal Reserve may scale back QE3 sooner than expected. This drove the US dollar index higher. In addition, the European Central Bank (ECB)’s surprise announcement of interest rate cuts distressed the euro, also pushing the US dollar index up above 81. A stronger greenback weighted base metals prices down. Chinese A-share also fell all the way down. Against this backdrop, base metals in China’s spot markets dropped across the board, with the SMMI down 0.56% last week. Jinchuan Group cut ex-works prices of Jinchuan nickel twice last week. Nickel led losses among base metals, with the SMMI.Ni down 2.23%. Investors increased positions of SHFE copper as capital strains eased at the start of the new month. Spot copper was offered at backwardation over SHFE 1311 copper contract. A growing number of buyers went bargain hunting, precluding any dramatic decline in spot copper prices. SMMI.Cu slipped a meager 0.58%. SMMI.Pb, SMMI.Sn and SMMI.Zn dipped 0.53%, 0.5% and 0.48%, respectively. Limited amounts of aluminum ingots arriving in east China allowed aluminum prices to drop only marginally, with SMMI.Al down 0.2%. Overall, supply was in excess of demand, with bearish sentiment dominating base metals market.
The Shanghai Composite Index tested 2,100 after falling by 2% last week. SHFE copper prices retreated to RMB 51,200/mt, down from RMB 52,100/mt for a loss of 1.8%. The SHFE/LME copper price ratio recovered and hit 7.2 as SHFE copper showed more resilience than LME copper prices. Positions for SHFE copper increased last week.
In spot copper markets, liquidity conditions improved, and spot discounts narrowed following a slight decline in SHFE copper, with some goods quoted at premiums over SHFE 1311 copper contract prices. Traders purchased goods at lower prices and downstream buyers also built stocks at prices below RMB 52,000/mt. Overall trading was up from a week ago.
SHFE 1401 aluminum contract prices retreated from the 20-day, 30-day and 60-day moving averages to RMB 14,280/mt, following LME aluminum prices down. However, prices for the most active SHFE aluminum contracts fell less than LME aluminum prices. In China’s spot markets, cargo holders held offers firm at the beginning of the week as fewer aluminum ingots arrived in markets, but became more eager to sell after aluminum prices fell later in the week and since traders feared prices would not rebound in the short-term. Falling aluminum prices and increased liquidity at the beginning of the month allowed some traders and downstream producers to enter the market, which helped improve transactions.
Caution will rule the market until the Third Plenary Session of the 18th Communist Party of China (CPC) Central Committee ends on November 12th. Aluminum prices will meet strong resistance in the coming week in the absence of positive news, with LME aluminum prices expected to move in a USD 1,800-1,850/mt band and with SHFE 1401 aluminum contract prices expected between RMB 14,260-14,380/mt.
SHFE lead prices were more resistant to declines last week, but still fell by RMB 130/mt and below all moving averages. Transactions were sluggish due to market uncertainties and a growing liquidity squeeze in China, which caused positions to shed almost 1,500 lots. SHFE lead prices will basically move this week in tandem with LME lead prices, but should be more resistant to declines. SHFE prices should rise to RMB 14,450/mt early this week, but fall back before finding support at RMB 14,250/mt.
In China’s spot lead market, the average SMM #1 lead price was down RMB 75/mt. Lead smelters held lead prices firm given their bullish attitude, but later moved goods more actively due to falling spot lead prices and soft downstream demand. Competition between different lead brands was intense after some supplies shifted from futures markets to Shanghai’s spot lead market. Gejiu-branded lead dominated Guangdong’s spot lead market since there was a growing price gap with other deliverable brands. Branded lead prices are set to climb back to RMB 14,250, but will more likely fall within the RMB 14,150-14,200/mt range. The price gap between branded lead in Shanghai and low-price lead will expand to around RMB 100/mt, up from last week’s gap of RMB 50/mt. Investors were not active in moving goods which they could deliver in futures market due to low chances of narrower gap between SHFE lead prices and spot lead prices with the approaching delivery date. Gejiu’s low-price lead will also continue to dominate Guangdong’s spot lead market this week.
As SHFE zinc prices leveled out and since markets were still lacking direction from recent macroeconomic news, investors in spot markets took a wait-and-see attitude. Spot premiums for #0 zinc against SHFE 1401 zinc contract prices were between RMB 50-110/mt, with traded prices between RMB 15,040-15,100/mt. #1 zinc prices continued to rise due to tight supply, with the price spread between #1 and #0 zinc narrowing from RMB 100/mt two weeks ago, to RMB 60/mt, and with prices for #1 zinc between RMB 15,000-15,030/mt. Zinc prices fell slightly last week, but remained above RMB 15,000/mt. Smelters were actively moving goods and maintaining high operating rates, causing supply to grow noticeably since downstream buying interest was low.
Macroeconomic news have been mixed, but better-than-expected US economic growth and an unexpected interest rate cut by ECB will help push up the US dollar index to 81, weighing down LME zinc prices. The market is awaiting new policies from the Third Plenary Session of the Eighteenth CPC Central Committee which ends on November 12th. Investors also believe US October non-farm employment data will fall short of expectations, which will help ease market concerns that the US Federal Reserve (Fed) will taper off QE3 before the end of this year. LME zinc prices will continue to test USD 1,900/mt this week, but meet resistance at USD 1,940/mt. SHFE 1401 zinc contract prices will move between RMB 14,900-15,000/mt, with spot premiums narrowing to RMB 50-100/mt. Cargo holders may lower prices, which will attract some bargain hunters to enter the market, so consumption will improve slightly.
In China’s spot tin market, prices presented continuous declines in the first three trading days last week, and hit a low of RMB 143,500-146,500/mt, with trading activity dull. Prices rallied to RMB 145,000-148,000/mt Wednesday afternoon as downstream consumers went bargain hunting and LME tin prices increased. Low-priced resources were thus soon sold out. However, spot tin prices failed to extend gains, only holding steady on Thursday and Friday, as LME tin prices fell back Wednesday night following an initial rise and came under downward pressure. Domestic tin smelters held quotes firm in the latter half of the week and were reluctant to sell, lending some support to prices.
Markets were focused last week on the latest interest rate meeting in Europe and US non-farm payroll figures. LME nickel prices fell steadily during the week of 4-8 November, closing Thursday at USD 14,040/mt. Prices were down due largely to sluggish economic conditions in Europe, where investors sold off the euro in response to low inflation and high unemployment rates. A rising dollar weighed down LME nickel prices, but after the European Central Bank announced it was cutting interest rates by 25 basis points, LME nickel retreated further below USD 14,000/mt to hit USD 13,901/mt. Initial US jobless claims were encouraging, while US 3Q GDP rose sharply by 2.8% and increased speculation over the timing of the tapering of QE3 measures by the US Federal Reserve. Markets are now less optimistic toward the US economic outlook, with Goldman Sachs cutting expectations for US 4Q GDP to 1.5%. Chinese exports rose by 5.6% in October and this news, coupled with encouraging manufacturing and services PMI readings released earlier, continues to signal a strong recovery of the Chinese economy and helped LME nickel prices rally on Friday.
The results of US non-farm payrolls and China’s PPI and CPI will affect nickel prices. The interest rate cut by the ECB, a strong dollar, and other market uncertainties will keep LME nickel fluctuating in the coming week between USD 14,100-14,500/mt. In China’s spot nickel markets, buying interest should improve this week, especially among traders. Prices of Jinchuan nickel are expected between RMB 97,000-99,500/mt, creating a price gap between Jinchuan and Russian nickel of around RMB 1,000/mt.