SMM Base Metals Weekly Price Review and Forecast (Dec. 23-27, 2013)

Chinese A-shares fell by nearly 5% last week. Liquidity conditions in China remain tight as most enterprises are focused on year-end debt settlements. As a result, money rates have remained relatively high. SHFE copper prices were weaker than LME copper, sending the SHFE/LME copper price ratio down to 7.05, its lowest for the year. Although SHFE copper prices rose along with LME copper prices to test a high of RMB 51,740/mt early in the week, prices then fell back rapidly and dipped below RMB 51,000/mt. SHFE 1403 copper contracts became the new most active contract, with trading volumes up sharply and positions soaring by over 20,000 lots, but selling pressure soon began to build. Copper prices are expected to show increasing volatility this week.

 

In China’s domestic spot copper markets, trading was light since a lack of any difference among SHFE copper contracts left no arbitrage opportunities for traders. Meanwhile, downstream producers only purchased to order. 

 

SHFE 1403 aluminum contracts switched to the new most active contract last Monday and prices hovered between RMB 14,055-13,990/mt for the first half of the week due to caution ahead of the Fed policy meeting. Prices for the most active contracts followed falling LME aluminum down to RMB 13,965/mt later in the week. In China’s spot markets, sluggish downstream consumption sent spot aluminum prices down to RMB 14,150/mt last Thursday. Some suppliers which have already fulfilled annual sales targets were holding back goods.  

 

In the coming week, LME aluminum prices should fluctuate in a USD 1,760-1,800/mt band, while SHFE 1403 aluminum contract prices will struggle at RMB 14,000/mt. In China’s spot markets, tightening year-end liquidity will continue to undermine buying interest, keeping aluminum prices at a discount over SHFE 1401 aluminum contract prices.  

 

SHFE lead prices rose in tandem with LME lead prices, another sign of increasing investor confidence in the Chinese economic recovery. The most active SHFE lead contracts shifted last week to contracts for February delivery and hit a weekly high of RMB 14,410/mt. Bolstered by LME lead prices, the most active SHFE 1402 lead contract prices this week should move between RMB 14,300-14,500/mt. SHFE lead prices, however, will be restrained by tight cash flows at enterprises due to year-end debt settlements and light transactions overseas due to the Christmas Day holiday.

 

Spot lead prices in the Shanghai market mostly traded between RMB 13,950-14,050/mt, up RMB 125/mt from two weeks ago. Downstream producers purchased aggressively on Tuesday and Wednesday last week as spot lead prices rose by RMB 75/mt, but reduced  purchases once spot prices began to fall. Bullish cargo holders, however, moved goods only in limited volumes to ease cash flow shortages, leaving supply still limited in Shanghai, Tianjin and Guangdong markets. This week, lead smelters will be more willing to trade due to tight cash flows, but lead-acid battery producers will still likely purchase only on an as-needed basis. A growing gap between SHFE lead and spot lead prices should provide opportunities for those cargo holders with deliverable brands to deliver goods to designated warehouses. With even fewer deliverable goods in spot lead markets, traded prices are forecast to move this week between RMB 14,050-14,250/mt

 

SHFE 1403 zinc contracts became the most actively traded contracts last week, rising from RMB 15,050/mt, to RMB 15,135/mt, a gain of 0.6%. Contract prices were boosted by rising LME zinc prices and found solid support at RMB 15,050/mt. Night trading for copper, aluminum, zinc, and lead futures began last Friday.

 

As SHFE zinc prices advanced, spot discounts expanded from RMB 0-40/mt early in the week to between RMB 20-70/mt. Smelters and cargo holders continued to move goods, but downstream buyers purchased on an as-needed basis due to cash flow problems and high zinc prices. #0 zinc prices were between RMB 15,020-15,080/mt, with #1 zinc prices between RMB 14,980-15,000/mt. High risk aversion sentiment kept overall transactions muted.

 

#0 zinc prices in Guangdong province were RMB 10-40/mt below Shanghai prices. Due to soft demand in Tianjin, #0 zinc prices were at one point RMB 10-30/mt below Shanghai prices, moving between RMB 15,030-15,080/mt. Huludao branded zinc produced on old production lines was quoted between RMB 16,200-16,220/mt.

 

Investors will now have more opportunities for trading now that night trading for SHFE zinc futures has begun. SHFE 1403 zinc contract prices are expected to move between RMB 14,950-15,100/mt this coming week. Tight cash flows will limit downstream purchasing, but smelters and traders making year-end settlements will also refrain from buying. Transactions should be quiet, with discounts between RMB 0-60/mt against SHFE 1403 zinc contract prices.

 

In China’s spot markets, tin smelters felt less financial pressure and were unwilling to cut prices for sales last week. The resultant decline in cheap resource supply caused low-end prices to edged higher last Tuesday to RMB 139,500/mt, but high-end prices remained unimproved at RMB 141,000/mt due sparse trades. However, prices fell back on Friday dragged by waning demand, with brands from Jiangxi sold at RMB 139,000/mt. Consumption remained feeble last week, leaving trade light.

 

Last week, the average #1 SMM nickel price was RMB 95,460/mt, up RMB 30/mt. The People’s Bank of China did not conduct any 7-day reverse repurchases last Tuesday, and no Central Bank Bills expired last week. The Shanghai Interbank Offered Rate (Shibor) surged, with the one-month Shibor up by 33.62 basis points to over 7%. Tight year-end liquidity dented downstream buying interest and traders were forced to lower prices to move goods. As a result, domestic nickel spot prices generally moved between RMB 95,000-96,000/mt despite strong LME nickel prices.  

 

This week, trading will be quiet with the approaching of the Christmas holiday. LME nickel prices are expected to hover between USD 14,150-14,400/mt this coming week due to positive market sentiment. In the face of tight year-end finances, trading in China’s domestic spot nickel market will be light, with deals expected mainly among traders.