SMM Copper Market Daily Review (2014-3-10)

SHANGHAI, Mar. 11 (SMM) – Dragged down by a plunge in LME copper prices, the most active SHFE copper contract sank to RMB 46,670/mt after gapping lower at RMB 48,130/mt during last Friday’s night session. The red metal closed down RMB 2,300/mt at RMB 46,830/mt. During the night session, positions for the most active SHFE copper contract gained 10,264 lots, and total positions increased 69,374 lots. A large number of investors went bargain-hunting for distant-month copper contracts. SHFE copper prices suspended trading at RMB 46,670/mt, and ended down RMB 2,460/mt at RMB 46,670/mt against the backdrop of a more than 2.8% drop in the Shanghai Composite Index. Trading volumes and positions rose by 212,000 lots and 5,084 lots, respectively, for SHFE 1405 copper contract, while total trading volumes and positions expanded by 480,000 lots and 60,248 lots, respectively. The most active SHFE copper contract faced massive sell-offs on Monday, and is unlikely to pick up in the future, with bearish technical indicators.

Dragged down by a fall of USD 300/mt in LME copper prices last Friday, SHFE lead contracts, except for SHFE 1403 copper contract, all suspended trading due to steep declines. Cargo holders tried to quote copper prices at a premium in the morning, but confronted low recognition in the market, with spot copper trading back at a discount. Spot copper was offered at a discount of RMB 0-140/mt in the Shanghai physical market on Monday. Traded prices were RMB 46,440-46,540/mt for standard-quality copper and RMB 46,480-46,660/mt for high-quality copper. Middlemen were hampered to enter the market by trading suspension for SHFE copper contracts, while downstream producers stepped up bargain-hunting. Cargo holders with long term orders started employing SHFE copper prices as their settle prices, bolstering trading for SHFE 1405 copper contract. During the afternoon trading hours, trading for SHFE copper contracts remained suspended, while spot discounts continued to widen. Cargo holders expected another fall of more than RMB 500/mt in copper prices, and traded in large volume. Mainstream quotations were at a discount of RMB 100-200/mt, and traded prices fell to the range of RMB 46,400-46,500/mt. A majority of investors were bearish on copper prices in the future after copper prices fell below key support levels, and stayed on the sidelines on Monday.

SMM’s most recent survey showed 60% of players in copper market were bearish on this week’s copper prices.

Vladimir Putin has discussed Crimea’s referendum in separate phone calls with German Chancellor Angela Merkel and British Prime Minister David Cameron, according to a Kremlin statement. It appeared that political crisis in Ukraine will remain a major threat to the market this week.

CFTC report indicated a rise of net short position in copper to 13,241 lots for the week of March 4. In addition, the cash-to-three-month backwardation in LME copper has fallen to USD 19/mt, from the earlier high of USD 50-70/mt, while ratio of canceled warrants also dropped below 50%. Thus, copper prices were losing support. Technical indicators also showed negative signs.

In China’s stock market, the Shanghai Composite Index plunged by nearly 3% on Monday, staging the biggest decline this year and breaking below 2,000. The amount of unlocked shares this week may exceed RMB 3.2 billion, the highest in six weeks, which may presage further declines in Chinese stocks. Report that authorities will resume initial public offering (IPO) approvals this month will also deal a blow to A-share market. In addition, China Securities Regulatory Commission’s Xiao Gang said measures for implementing new delisting system will be rolled out this year at earliest. These factors, combined with the government’s caution towards T+0 settlement system and receding influence of the NPC and CPPCC sessions, drove a sharp decline in stock prices, largely hurting market confidence. This may add to a drag on copper prices.

A large amount of bonds and trusts are due to mature in March, pushing up credit risk during the month.

In money markets, the PBOC may continue to conduct bond repurchases this week as a large sum is due to be injected into the market. As such, liquidity conditions will remain relatively tight, dampening trading activity in stock and futures markets. In this context, copper prices are expected to fall further with shorts opening positions.

In China’s spot market, copper was offered at premiums over SHFE current-month copper contract prices early on Monday. However, SHFE 1405 copper contract prices dropped by the daily limit and hedged goods continued to flow into spot market, fueling fears in the market and pushing spot copper back into discounts. In this context, 60% of industry participants expected LME copper prices to fall below USD 6,600/mt this week, with SHFE 1405 copper contract prices slipping below RMB 46,000/mt.

40% of market players believed LME copper prices will hold steady at USD 6,600-6,750/mt this week, and SHFE 1405 copper contract prices will remain in the RMB 46,500-47,300/mt range.

US stocks bucked the trend to extend gains Monday, which may limit downward room for copper prices. Meanwhile, the weak US dollar and diminishing LME copper stocks will also lend some support to copper prices. Gold and crude oil, which are expected to offer guidance for copper prices, showed no sharp declines.

In China, cargo holders in spot copper market held quotes firm at RMB 46,000/mt after the slump in SHFE copper prices, with an attempt to narrow spot discounts. Some downstream also entered the market to hunt for a bargain after prices tumbled. As a result, some industry insiders expected copper prices to consolidate at lows this week.