SMM Base Metals Market Daily Review (2014-5-5)

SHANGHAI, May 6 (SMM) –

Copper
The most active SHFE 1407 copper contract rallied Monday to RMB 47,920/mt after starting higher at RMB 47,660/mt, boosted by the bottoming out of LME copper prices during the May Day holiday. Dampened by worse-than-expected HSBC’s China manufacturing PMI and a fall in the Shanghai Composite Index, SHFE copper prices sank to a low of RMB 47,520/mt subsequently. The red metal hovered narrowly around RMB 47,600/mt during the afternoon trading session, and finished up RMB 60/mt, or 0.13%, at RMB 47,670/mt. Traded volumes and positions for the SHFE 1407 copper contract contracted 78,644 lots and 5,418 lots respectively. Meanwhile, traded volumes and positions for the SHFE 1408 copper contract expanded 2,236 lots to 5,206 lots, respectively.

In the Shanghai physical market, copper was quoted Monday at a premium of RMB 680-850/mt over the nearby SHFE contract. Traded prices were RMB 49,470-49,730/mt for standard-quality copper and RMB 49,550-49,870/mt for high-quality copper. Despite the absence of guidance from LME lead prices, SHFE lead prices still staged a rebound. Imported copper dominated the market as a large amount of this type of copper supply inflated physical supply. Copper premiums initially held steady at RMB 1,000/mt, but fell abruptly afterwards. Cargo holders lowered premiums voluntarily to raise cash, but a majority of market participants stayed on the sidelines. After physical premiums lost around RMB 300/mt subsequently, middlemen largely held a wait-and-see posture. Downstream producers rarely jumped in following declines both in futures and physical markets. Trading activity was rather sluggish on Monday due to volatile prices movements after the May Day holiday.

According to SMM’s survey, 60% of participants in copper industry remained cautious towards this week’s copper price trends.

The US Q1 GDP rose at its slowest pace in nearly three years on a quarterly basis, but nonfarm payrolls grew at the fastest pace in about two years in April, which was seen as a sign that the country’s recovery was still unsteady. Other major economic indicators also turned out mixed, with consumption, manufacturing PMI, and ADP job data reported upbeat but labor force participation rate back to a 30-year low of 62.8%. These data left the US stocks subdued, lending little support to copper prices.

The latest CFTC showed net short positions for copper declined to 13,881 lots for the week ending April 29, an indication that hedge funds were less bearish towards copper prices. Technical indicators, however, pointed to some more downside and weaker support for copper prices. As such, over half of industry insiders surveyed by SMM expected LME copper prices to remain at USD 6,650-6,750/mt this week.

20% of these industry insiders were bearish, believing that LME copper prices would fall below the 20-day moving average and SHFE 1407 copper contract prices would test support at RMB 47,300/mt.

China’s stock market is expected remain weak given disappointing economic data and resumption of IPO listing, weighing copper prices on.

Now that the SHFE/LME copper price ratio has recovered some, imported copper supply in China’s domestic markets will increase, imposing a ceiling on any rises in spot premiums. In addition, as prices for near-dated SHFE copper contracts remained stronger than those for contracts with longer maturities, distant-month contracts may still suffer from selling pressure.
The remaining 20% of market players were still optimistic, saying that LME copper prices may stage a rebound to rise above USD 6,750/mt, and SHFE copper for July delivery may stand above RMB 48,000/mt.

European Central Bank President Mario Draghi told German lawmakers that the ECB is still far from engaging in large-scale bond purchases since the euro zone economy is on the mend and inflation might have bottomed. The recovery in the euro zone may help appease the market.
In Ukraine, the escalating crisis caused gold prices to bounce back and rise above USD 1,300/oz, giving guidance to copper prices.

As for market fundamentals, LME copper stocks were still falling, down to a mere 230,000 mt, and were only about 120,000 mt excluding canceled warehouse warrants. This has driving the cash-to-three-month backwardation in LME copper USD 36/mt. SHFE copper stocks were only 100,000 mt just before the May Day holiday. In addition, copper financing deals were dampened due to higher costs resulting from a weaker RMB, presaging decline in imported copper supply. That, in combination with recovering copper consumption in China’s physical markets, may help bolster copper prices. Besides, another round of short squeeze is still possible, as holdings in SHFE 1405 copper contract were 48,000 lots as of May 5, while SHFE copper stocks were only around 100,000 mt. Therefore, some investors believed these factors will combine to push up copper prices this week.

Aluminum
HSBC’s final reading of China manufacturing PMI for April came in at 48.1, up slightly from March, but down from the flash reading of 48.3. This caused the most active SHFE aluminum contract to close at a session low of RMB 13,210/mt on Monday, down RMB 145/mt or 1.09%. Trading volumes surged 26,178 lots to 113,884 lots, but positions shrank 918 lots to 113,884 lots.
Spot aluminum largely traded at RMB 13,220-13,230/mt in Shanghai, RMB 13,210-13,220/mt in Wuxi, and RMB 13,250-13,260/mt in Hangzhou on Monday. Cargo holders in general held to the sidelines after returning from the three-day holiday, while downstream producers bought on an as-needed basis. In the afternoon, SHFE 1405 aluminum contract lost nearly RMB 100/mt, forcing spot aluminum suppliers to cut offers to RMB 13,170-13,200/mt, but few deals were completed.
SMM surveyed 39 large aluminum smelters and traders in China.

An overwhelming 67% of market players surveyed by SMM expect spot aluminum prices to remain stable between RMB 13,200-13,250/mt this week. First, LME aluminum will likely fluctuate in a tight USD 1,770-1,820/mt range and SHFE 1407 aluminum contract will come to stabilize after giving back previous gains, with prices expected between RMB 13,200-13,350/mt. Second, spot aluminum suppliers will refrain from selling at lower prices now that liquidity has increased with the start of the new month, preventing aluminum prices from falling.

The remaining 33% are bearish that spot aluminum prices will fall below RMB 13,200/mt. First of all, deteriorating Ukraine crisis and growing LME aluminum inventories will send LME aluminum down to USD 1,750-1,800/mt. Second, on the technical side, SHFE 1407 aluminum contract will drift lower to RMB 13,100-13,250/mt. Third, growing arrivals after the three-day holiday and bearish sentiment arising from weak SHFE aluminum will drag spot aluminum prices down.

Lead
SHFE 1406 lead contract slipped to RMB 13,830/mt after starting at RMB 13,940/mt on Monday, but then recovered some losses to end up RMB 5/mt at RMB 13,900/mt. Traded volumes gained 3,060 lots to 20,628 lots, and positions were also up 3,762 lots to 91,552 lots.

In the Shanghai physical lead market, Chihong brand lead traded at RMB 13,950/mt and gained more favor than other brands. Hanjiang and Hengbang brand lead traded at RMB 13,920/mt. Downstream producers did not engage in appreciable restocking following the three-day holiday, with most sourcing only to need.

SMM surveyed 30 market players in China’s lead market regarding their views on lead price trends in this coming week.

47% of those surveyed anticipate little change in lead prices, with LME lead and spot lead prices expected at USD 2,070-2,100/mt and RMB 13,800-13,950/mt, respectively. First, markets will stay cautious before China’s CPI and PPI data and the European Central Bank’s monetary policy decision are announced. Second, on the one hand, tight lead concentrate supply will curd lead production, offering support to lead prices. On the other hand, sluggish downstream consumption will prevent lead prices from rising.

Still, another 33% have painted a rosy picture, believing spot lead prices in China will rise to RMB 13,850-14,000/mt. First of all, tight lead concentrate supply will create a shortfall of lead as well, allowing smelters to hold back goods at lows. Second, smelters will not be anxious to sell now that liquidity has increased with the start of the new month and growing cash flows will also give downstream producers incentive to buy.

The remaining 22% are bearish that LME lead will fall to USD 2,050-2,080/mt and spot lead in China will drop to RMB 13,800-13,900/mt. On the technical side, MACD and KDJ indicators suggest that LME lead will face correction. Lead-acid battery producers in China will cut production further against a pileup of inventories, eroding lead demand.

Zinc
SHFE 1407 zinc contract prices opened at RMB 15,055/mt on Monday, and then rose to touch RMB 15,155/mt, although prices lacked directions from the LME market, and closed at RMB 15,130/mt, up RMB 75/mt or 0.5%. Trading volumes increased by 3,060 lots to 20,628 lots, and total positions increased by 3,762 lots to 91,552 lots.

#0 zinc prices were between RMB 15,110-15,140/mt, with spot premiums between RMB 0-30/mt against SHFE 1407 zinc contract prices. #1 zinc prices were between RMB 15,090-15,100/mt. SHFE 1407 zinc contract prices opened at RMB 15,055/mt, then rose to RMB 15,110/mt, but spot premiums narrowed. Smelters and traders moved goods actively due to high zinc prices, when combined with growing spot zinc inventories during the holiday, spot supply tightness eased. But weak demand depressed traders. Downstream buying interest was low, leaving transactions muted.

Shuangyan branded #0 zinc prices were between RMB 15,120-15,130/mt, with RMB 15,110-15,120/mt for Qinxin and Yuguang branded #0 zinc. AZ branded #0 zinc prices were around RMB 15,110/mt. As SHFE 1407 zinc contract prices inched up in the afternoon, Shuangyan branded #0 zinc prices rose to RMB 15,150-15,160/mt, with trading quiet.

LME zinc prices bottomed out then rose last week. Will LME zinc prices extend gains this week? SMM surveyed 30 market players and found that 37% are neutral, believing LME zinc prices will move between USD 2,020-2,050/mt, and SHFE 1407 zinc contract prices will hover between RMB 15,050-15,200/mt. LME zinc prices will lack directions from macroeconomic news, with spot premiums between RMB 0-30/mt.

33% are optimistic, believing LME zinc prices will rise further this week to test USD 2,080/mt, and SHFE 1407 zinc contract prices will soar to RMB 15,300/mt. The number of US non-farm employment increased 288,000 in April, its largest growth since January 2012, compared to the 210,000 expected. Meanwhile, US April unemployment rate dropped sharply to 6.3%. In the euro zone, Portugal announced it will no longer need international bailout, and Ireland extricated itself from crisis, too, which will boost market confidence and lend support to zinc prices. Besides, domestic demand will bolster zinc prices, with spot prices expected to rise to RMB 15,250/mt.

30% are bearish, thinking LME zinc prices will extend declines. Growing Ukraine crisis will fuel risk aversion, dragging down base metals prices, with LME zinc prices testing support from USD 2,000/mt. China’s official PMI in April stood above 50, while HSBC’s PMI for China shrank for the fourth straight month, which will push down SHFE 1407 zinc contract prices to test RMB 15,000/mt. Besides, high zinc prices prompted some smelters and traders to move goods actively, causing supply tightness to ease. In this scenario, spot zinc prices will drop below RMB 15,000/mt.

Tin
In Shanghai physical tin market, mainstream traded prices fell to RMB 139,500-141,500/mt on Monday due to slack demand. Nanshan, Jinlong and Weitai brand tin traded at the lower end of the price band. In the afternoon, the low-end price dropped further to RMB 139,200/mt.

An overwhelming 70% of market players surveyed by SMM are bearish toward spot tin prices in Shanghai this week. First, weak LME tin during the May Day holiday has turned market players in Shanghai physical market bearish. Second, large quantities of Nanshan and Jinlong brand tin have arrived, adding to oversupply pressure. These pessimistic market players expect spot tin prices to fall to RMB 138,000/mt.

The remaining 30% expect spot tin prices to come to stabilize around RMB 140,000/mt. First, recently released US non-farm employment data were positive, which will prevent LME tin from falling. Second, despite tepid demand, falling supply in Shanghai physical market will put a floor under prices.

Nickel
SMM #1 nickel prices were between RMB 125,100-125,300/mt. Jinchuan raised nickel prices by RMB 300/mt, to RMB 125,300/mt, with trader quotes close to Jinchuan’s prices. Russian nickel supply was so tight that transactions were rarely made among traders. Goods were mainly purchased by plants, with prices between RMB 125,000-125,200/mt. Steel mills reduced Russian nickel utilization due to low profitability, shifting to Xinjiang’s and Jinchuan’s nickel, causing transactions of these brands to improve.

SMM surveyed 36 market players and found that 50% market players are bullish toward nickel price trends, believing LME nickel prices will rise to USD 18,500-18,800/mt. they base their opinion on Indonesian ban on the exports of unprocessed ore. Steel plants will raise output to complete quarter target in Q2, which will give support to nickel prices.

25% believe LME nickel prices will level out. Ongoing Ukraine crisis will keep investors cautious, with nickel prices moving between USD 18,100-18,500/mt.

The remaining 25% believe LME nickel prices will fall to hover between USD 17,800-18,000/mt. The strong US non-farm employment data in April will push up the US dollar index, which will weigh on base metals prices. Besides, ongoing Ukraine crisis undermined investor risk appetite.