SMM Base Metals Market Daily Review (2014-4-14)

SHANGHAI, Apr. 15 (SMM) –

Copper
SHFE copper prices challenged resistance at the RMB 47,000/mt mark after starting last Friday’s night session at RMB 46,600/mt, boosted by a sharp rally in LME copper prices. The red metal, however, tested a low of RMB 46,390/mt subsequently due to profit-taking, and finished up RMB 100/mt at RMB 46,580/mt. During the night session, traded volumes rose to some 320,000 lots, while positions decreased by 1,306 lots. Positions for the SHFE 1408 copper contract instead surged by 10,740 lots, with significantly brisk trading activity. On Monday, the short squeeze for the SHFE current-month copper contract gave a boost to SHFE copper contracts, with the most active SHFE copper contract hitting a high of RMB 46,950/mt. The contract prices later fell back due to technical resistance, and closed Monday up RMB 300/mt, or 0.65%, at RMB 46,780/mt. Traded volumes gained by 147,000 lots, while positions shed by 17,388 lots. Positions for the SHFE 1408 copper contract expanded by 17,080 lots, and positions for the SHFE current-month copper contract continued to hover at around 10,000 lots after decreasing by 7,520 lots. The copper warrant report released by the Shanghai Futures Exchange suggests that 5,000 lots of positions are expected to be liquidated in the last trading day for the SHFE 1404 copper contract. This will further push up the SHFE current-month copper contract price and cause sell-offs in SHFE distant-month copper contracts. The SHFE current-month copper contract will continue to outperform the most active SHFE copper contract, with the price gap between these two contracts expected to widen.

In the Shanghai physical market, copper was offered Monday at premiums of RMB 150-600/mt over the SHFE current-month copper contract price. Traded prices were RMB 48,300-48,450/mt for standard-quality copper and RMB 48,400-48,600/mt for high-quality copper. A sharp rebound in the SHFE current-month copper contract price drove the price gap between the SHFE 1404 copper contract and the SHFE 1405 copper contract to as high as RMB 600/mt. As a result, physical premiums for high-quality copper were quoted at RMB 500-600/mt, and those for standard-quality copper were RMB 450-500/mt. The high premiums restrained trading activity in the market. SHFE copper prices rose further by around RMB 500/mt by the midday, while the price gap between the SHFE 1404 copper contract and the SHFE 1405 copper contract also expanded to RMB 900/mt. Cargo holders ramped up moving goods to generate cash before the delivery date, which inflated copper supply and in turn significantly dragged down physical premiums. Premiums were quoted mostly between RMB 150-350/mt, but transactions were modest and largely were conducted among middlemen. Downstream producers barely entered the market believing that prices were too high. Short positions for the SHFE current-month copper contract should continue to see liquidations ahead of the delivery due Tuesday since SHFE copper prices now hover at high levels. Although SHFE copper prices pulled back due to the lack of upward impetus during the afternoon trading hours, the price gap between SHFE 1404 and 1405 copper contracts still hovered around RMB 800/mt. Cargo holders thus continued to have high selling interest to generate cash. Physical premiums were initially offered at RMB 150-280/mt, but narrowed to RMB 0-90/mt at the tail of the trading, with traded prices between RMB 48,100-48,350/mt. Some aggressive speculators entered the market to purchase copper and sell futures contracts as physical premiums swung by over RMB 500/mt. Trading activity, however, was merely modest with sufficient supply in the market.

SMM’s latest survey revealed that 59% of market players expected copper prices remain range-bound this week, with LME copper prices consolidating at USD 6,600-6,700/mt, and SHFE most active copper contract prices between RMB 46,200-47,000/mt. These players based their opinions partly on the intensifying Russian-Ukraine tension with gunfire reported.

On the macroeconomic front, the US economic indicators proved positive, but financial reports from large companies turned out disappointing, sending the US stock prices down. Subdued stock market may prevent copper prices from swinging sharply.

The most recent CFTC report indicated a decline in net short positions in copper to 18,501 lots for the week ending April 8. Technically, although LME copper prices held above the 5-day moving average, selling pressure remained strong at USD 6,700/mt.

With respect to China’s markets, Shanghai Composite Index rebounded after the China Securities Regulatory Commission approved to pilot cross-border investment in Shanghai and Hong Kong’s stock trading. Chinese Premier Li Keqiang said no massive stimulus is in the offing, but market believes the Chinese government will not allow its economy to decline further, and thus expects the government to “fine tune” its monetary policies. The caution resulting from the above factors may leave copper prices vacillating in the current trading range.

35% of investors surveyed remained optimistic, saying that LME copper prices may test resistance at USD 6,750/mt and SHFE 1407 copper contract prices may stand above RMB 47,000/mt, citing the strong trends in crude oil and gold.

As for market fundamentals, LME copper stocks continued falling to less than 250,000 mt, while SHFE also reported noticeable declines in copper stocks to around 142,671 mt. More importantly, positions for the SHFE 1405 copper contract are now as high as 89,440 lots, meaning there will be an over 80,000 mt supply gap when the contract is due for delivery in mid-May even as SHFE copper stocks present no further decline during the month ahead. That may occur at the same time the SHFE/LME copper price ratio remains unprofitable for importing copper. In this context, some expected another round of potential short squeeze, and were thus optimistic on premiums for physical copper to the nearby SHFE copper contract after the delivery date. The persistently high premiums will in turn help with further rise in copper prices.

However, 6% of market participants were still bearish, believing that LME copper prices will fall below USD 6,600/mt and SHFE copper for July delivery will test support at RMB 46,000/mt. The European Central Bank will ease monetary policy further if the euro keeps strengthening, President Mario Draghi said April 12 as world finance chiefs ramped up pressure on Europe to ward off deflation. He added the euro’s exchange rate had become increasingly important to policy and would act as a trigger. The euro weakened as a result, and the US dollar index tended to rise following continuous falls, weighing copper market on. Besides, technical indicators are unlikely to give any strong support to the prices, but showing a sign of a pullback.

Aluminum
On last Friday night, SHFE 1406 aluminum contract hovered above the 5-day moving average after starting at RMB 13,210/mt, and finished the night session at RMB 13,215/mt. Trading volumes totaled 13,008 lots, and positions added 98 lots to 127,260 lots. On Monday, the most active contract moved sideways for most of the day, but rose as the closing bell approached to close the day up RMB 10/mt at RMB 13,235/mt. Trading volumes during the daytime hours totaled 14,434 lots, and positions decreased 3,036 lots to 124,224 lots. The light metal should continue to test resistance at the 60-day moving average for the near term.

Spot aluminum largely traded at RMB 12,940-12,950/mt in Shanghai, RMB 12,940-12,960/mt in Wuxi, and RMB 12,950-12,960/mt in Hangzhou on Monday. Trading was bleak as bullish sentiment is growing. In the afternoon, rising SHFE aluminum lured buyers in, but sellers held back goods in hopes of higher prices at sight.
SMM surveyed 38 large aluminum smelters and traders in China.

58% of the market players surveyed are bullish that spot aluminum prices will rise above RMB 13,000/mt this week, with reasons below. First, recently released US initial jobless claims, consumer sentiment index and PPI were all positive, which will push LME aluminum up to USD 1,860-1,920/mt. Second, with bearish sentiment fading, the most active SHFE aluminum contract looks set to move higher to RMB 13,250-13,350/mt. Third, traders and downstream producers are more willing to buy, also offering upward momentum to spot aluminum prices.

Another 37% see spot aluminum prices little changed between RMB 12,940-13,000/mt. First, LME aluminum will likely fluctuate in a tight USD 1,860-1,900/m band. Second, SHFE 1406 aluminum contract has met strong resistance at the 60-day moving average, but has also found strong support at the bottom, with prices expected between RMB 13,150-13,250/mt. Third, downstream producers are reluctant to jump in at current high prices.

The remaining 5% have pained a dismal picture of this week’s spot aluminum prices, worrying that prices will fail to hold onto RMB 12,940/mt mark. First, a stronger greenback and deteriorating Ukraine crisis will weigh LME aluminum down to USD 1,810-1,860/mt. Second, traders will become anxious to sell at highs, which will add to oversupply pressure. Third, downstream producers will show little buying interest.

Lead
The most active SHFE 1405 lead contract price started last Friday’s night session at RMB 13,735/mt, and later dipped to RMB 13,695/mt before rebounding to RMB 13,745/mt. The metal ended down RMB 25/mt at RMB 13,735/mt. During the night session, traded volumes were 22 lots, while positions added 4 lots to 6,458 lots. On Monday, SHFE lead prices gradually crept up to RMB 13,780/mt, and finished level with last Friday at RMB 13,760/mt. Traded volumes contracted 298 lots to 698 lots, while positions shrank 248 lots to 6,206 lots. SHFE lead prices saw the weakest performance among the base metals complex due largely to seasonally low consumption, while downstream infrastructure construction for copper, aluminum, and zinc, however was in full swing.

In the Shanghai physical lead market, goods from Chihong Zn & Ge traded Monday between RMB 13,750-13,760/mt at discounts of RMB 10-20/mt over the most active SHFE 1405 lead contract price. Traded prices were RMB 13,730-13,750/mt for Nanfang, RMB 13,750/mt for Humon, and RMB 13,730/mt for Shuangyan. Traders were actively purchasing Nanfang resources in a bullish attitude. Some downstream producers ramped up purchases, while others remained in a wait-and-see posture, with trading volumes level with last week.

Lately SMM has carried out a survey of 30 industrial participants on whether the rebound in lead prices will be sustained this week. The survey shows that 60% are bullish, expecting LME lead prices to move up to the USD 2,100/mt mark, SHFE 1405 lead contract prices to rise above RMB 13800/mt, and spot lead prices to level with SHFE lead prices. Among a slew of economic reports scheduled for release this week, US retail sales and housing starts both are expected to be positive. The eurozone’s March CPI should fall further to 0.5%, down from February’s 0.7%. This, coupled with the loose monetary policy speech by the European Central Bank’s President Mario Draghi, will strengthen market hopes of quantitative easing (QE) in the single currency bloc.

In China, Q1 GDP, industrial output for March and retail sales of social consumer goods all are set to be released this week. China’s Q1 GDP, however, is unlikely to come in encouraging given soft PMIs and industrial output over the last three months, but if reports are disappointing, expectations will grow for new pro-growth policies from the Chinese government.

LME aluminum, zinc, tin, and nickel all have risen above major moving averages, while LME lead also has snapped its earlier losing streak, with technical indicators positive for the near term. In China’s physical lead markets, most base metals producers and traders are now disinclined to trade, which is pushing up spot premiums over the most active SHFE lead contract price. Moreover, lead supply is relatively scarce in the market as Henan Yuguang Gold & Lead, Yunnan Chihong Zn & Ge, Guangxi Chengyuan Mining & Smelting, and Jiangxi Copper have entered maintenance cycles, helping support lead prices.

30% of the surveyed hold that lead prices will be range-bound this week. A series of economic reports out of China will be under the spotlight this week, but are expected to be rather lacklustre, Meanwhile, China’s Premier Li Keqiang reiterates that the Chinese government will not introduce significant pro-growth policies for the near term, calming market speculation to some extent. In this context, investors will be again concerned over a slowdown in the Chinese economy, which should drag down base metals prices. A possible fall in the euro zone’s March CPI is expected to rekindle deflation concerns. After a decline in the euro against the US dollar and potential corrections in oversold conditions, the US dollar index looks set to rebound this week. In addition, capital flows in China could be further strained due to submission of taxes by enterprises this week, while the lingering Ukraine crisis will also put downward pressure on lead prices.

The remaining 10% are bearish, believing that spot lead prices will fall back this week to the RMB 13,600-13,700/mt trading range. Downstream lead-acid battery producers will cut back on production due to poor sales and mounting finished goods inventories. In addition, positions for the SHFE 1404 lead contract gained by more than 2,000 lots in two days with increasing buying interest at low prices. Positions now stand at 6,500 lots, which should increase lead ingot supply in the market after the delivery date.

Zinc
SHFE 1406 zinc contract prices opened at RMB 14,970/mt last Friday evening, falling back after touching RMB 15,000/mt, dragged down by LME zinc prices, dipping to RMB 14,915/mt, and finally closing at RMB 14,945/mt, down RMB 25/mt or 0.17%. SHFE 1406 zinc contract prices opened at RMB 14,945/mt on Monday, then fluctuated in a narrow range, hovering between RMB 14,935-14,955/mt, and edging up with LME zinc prices, once touching 14,985/mt, and closing at RMB 14,980/mt, up RMB 10/mt or 0.07%. Trading volumes decreased by 2,452 lots, to 10,528 lots, and total positions decreased by 1,660 lots, to 59,442 lots.

#0 zinc prices were between RMB 14,880-14,900/mt, with spot discounts between RMB 40-70/mt against SHFE 1406 zinc contract prices. #1 zinc prices were around RMB 14,860/mt. SHFE 1406 zinc contract prices opened at RMB 14,950/mt on Monday, and then leveled out. Spot prices remained firm due to tight supply as some smelters conducted maintenance and since traders were holding back goods. Spot discounts narrowed by RMB 30/mt. Traders were actively moving goods, while downstream enterprises purchased on an as-needed basis, causing transactions to improve. Shuangyan branded #0 zinc prices were around RMB 14,900/mt, with RMB 14,880-14,890/mt for Yuguang, Qinxin and Baohui branded #0 zinc.

LME zinc prices rose by 1.1% last week. Will LME zinc prices extend gains this week?

SMM undertook a survey of 30 market players and found that 53% are neutral, believing LME zinc prices will level out between USD 2,020-2,060/mt, and SHFE 1406 zinc contract prices will move between RMB 14,900-15,050/mt, with spot discounts around RMB 50/mt. the market will see no significant news this week. The US Federal Reserve (Fed) Chairwoman Janet Yellen will speak on Tuesday and Thursday, with the market uncertain when the Fed will raise interest rates. Growing Ukraine crisis will fuel market reticence. SHFE 1406 zinc contract prices will surge to the 60-day moving average but then fall back.

30% market players believe LME zinc prices will rise to test USD 2,080/mt, and SHFE 1406 zinc contract prices will test RMB 15,150/mt. US economic data have been positive recently. US March retail sales rose 0.9%, the largest gain over the past year, compared to the 0.3% in February. This shows US consumption is recovering, which will positively affect zinc prices. Some smelters are conducting maintenance, while traders were holding back goods, causing spot supply to tighten and keeping spot prices firm, which caused spot discounts to narrow recently. Meanwhile, SMM statistics shows inventories in Shanghai, Guangdong and Tianjin fell for a sixth straight week. Downstream demand improved since March, with operating rates die-cast zinc alloy producers, galvanizers and zinc oxide enterprises growing steadily, pushing up spot zinc prices. Spot prices look set to rise to RMB 15,050/mt this week.

The remaining 17% are pessimistic, thinking LME zinc prices will drop to test USD 2,000/mt, and SHFE 1406 zinc contract prices will test support from RMB 14,800/mt. Some goods will be released to the market after delivery, pushing down spot prices below RMB 14,800/mt. They base their opinion on the downbeat economic data from China. China's March CPI was 2.4%, while PPI was down 2.3% YoY, dropping for the 25th straight month, with deflationary pressure growing. China's Q1 GDP data, March retail sales, fixed assets investments in cities and towns and value-added at scale efficient industries will be released this week, which are pessimistic. The State Council pushed a series of policies to stabilize economic growth, but Premier Li Keqiang expressed at the Boao Forum that China will not use strong stimulus policies, which distressed market confidence.

Tin
In Shanghai physical market, most transactions were between RMB 140,000-141,000/mt on Monday, little changed from last Friday. Downstream producers in general held to the sidelines, leaving trading muted.

Half of the market players surveyed by SMM see spot tin prices in China hovering near RMB 140,000/mt this week. First, LME tin has little upward momentum on the one hand, but has little room to fall on the other hand. Second, smelters will refrain from selling at lower prices, while buyers will be disinclined to buy at higher prices, creating little change in spot tin prices.

Another 30% are bearish, believing that growing supply of second- and third-tier brand goods and tepid demand will drag tin prices down.

The remaining 20% have painted a rosy picture. These optimistic market players understand that LME tin will rise to challenge resistance at USD 23,600/mt, which will boost sentiment in China’s physical tin market. Meanwhile, smelters will hold back goods at low prices.

Nickel
In Shanghai, SMM #1 nickel prices were between RMB 120,000-121,000/mt. Jinchuan raised nickel prices by RMB 1,000/mt, to RMB 121,000/mt. Transactions were mainly made among traders engaging in arbitrage operations in Wuxi. Market players were replenishing goods due to market optimism, but end-users' buying interest was low.

SMM surveyed 36 market players and found that 72% believe LME nickel prices will continue to rise to USD 17,800-18,500/mt. they base their opinion on effects from Indonesian ban on the exports of unprocessed ore. Total positions hit a record high of 230,000 lots, with strong long momentum. One investment institution's short positions were above 40% in March, with a large number of shorts expected to be drove out of the market.

28% investors believe LME nickel prices will level out between USD 17,100-17,500/mt. The US dollar index is expected to improve, weighing down nickel prices. When combined high LME nickel inventories and sliding stainless steel output and profit in China, nickel prices will unlikely rise.