SMM Copper Market Daily Review (2014-6-16)

SHANGHAI, Jun. 17 (SMM) – The most active SHFE copper contract continued to swing by less than RMB 150/mt after opening last Friday’s night session at RMB 47,710/mt. Prices for the contract later encountered resistance at RMB 47,830/mt, and finished up RMB 210/mt at RMB 47,760/mt. During the night session, trading volumes for the most active contract fell to some 50,000 lots, and positions added by 2,548 lots.

On Monday, SHFE copper prices retreated after failing to rise above RMB 48,120/mt due to selling pressure and shorts taking profits, and ended up RMB 480/mt, or 1.01%, at RMB 48,030/mt. Trading volumes for the most active contract shrunk by 119,000 lots, and positions shed by 6,714 lots. Prices for the SHFE 1406 lead contract rallied by the daily trading limit to RMB 51,300/mt after starting at RMB 49,190/mt, and closed up RMB 1,590/mt at RMB 50,450/mt. Trading volumes for the SHFE front-month copper contract stood at 3,310 lots. The SHFE 1409 lead contract crept up to a high of RMB 47,780/mt after opening at RMB 47,440/mt, and ended up RMB 420/mt at RMB 47,740/mt. Positions for the contract expanded by 3,868 lots.

In the Shanghai physical market, copper was offered Monday at a RMB 200-400/mt discount over the SHFE front-month copper contract. Traded prices were RMB 48,820-48,920/mt for standard-quality copper and RMB 48,900-49,160/mt for high-quality copper. The price gap between the SHFE 1406 and 1407 copper contracts still hovered around RMB 800/mt, and the SHFE/LME copper price ratio also improved appreciably. Prices for imported standard-quality copper traded at high discounts, standing as much as RMB 200/mt below those for high-quality copper.

Some middlemen later entered the market to purchase low-price standard-quality copper to meet demand from long-term orders. This decreased standard-quality copper supply, causing physical discounts to narrow slightly. High-quality copper, however, still traded at high discounts, with quite trading activity. A small number of speculators bought physical copper and sold off futures contracts, and downstream producers mostly stayed on the sidelines before the delivery date due Tuesday. Physical copper is expected to trade at high premiums on Tuesday following the expiration of the SHFE 1406 lead contract.

SHFE copper prices hovered at high levels during the afternoon trading hours, compelling a large number of short investors to liquidating positions for the SHFE front-month copper contract. Trading activity was quite with sellers and buyers both on the sidelines. Physical copper discounts narrowed slightly, hovering largely between RMB 180-350/mt. The SHFE 1406 copper contract rose by the daily trading limit at the tail of the trading, and the SHFE 1407 copper contract traded between RMB 48,950-49,150 on Monday.

SMM survey reveals that 25% of industry insiders are bullish towards copper prices this week. The SHFE/LME copper price ratio rose to 7.18 on Monday, leading some investors to believe stronger SHFE copper will help drive LME copper prices higher.

In China, the Shanghai Composite Index rallied lately and stood above 2,050, with trading volumes expanding last Friday. The rebound is partly aided by the possible resumption of IPO listing following 10 firms securing approvals. Besides, growing anticipation for easing monetary policies is also providing impetus for shares to rise. The increase in stock market will give a boost to copper futures this week.

In addition, most market players expected high copper premiums after SHFE 1406 copper contract matures, which will also lend support to copper prices. As such, about one quarter of respondents expect LME copper prices to cross above USD 6,700/mt and SHFE copper to stand above RMB 48,000/mt this week.

65% of market players surveyed predict that LME copper prices will hold steady at USD 6,620-6,700/mt, with SHFE copper also remaining at RMB 47,400-48,000/mt.

The governor of Bank of England Mark Camey said last Thursday that interest rate hike may come earlier than expected. This week, market will focus on interest rate policy of the Federal Reserve. Expectation for a rise in Fed funds rates grew after BOE governor’s remark, which will help bolster the US dollar, in turn weighing on metal markets.

Geopolitical crisis will add to a drag on copper market this week, especially the Iraq conflict which pushed crude oil price to its highest since last September. However, the tension showed a sign of easing after the US intervened. Moreover, pro-Russian separatists in Ukraine shot down an army transport plane last week, killing 49 servicemen and dealing a blow to a military campaign. In this context, higher-risk assets, such as copper, become less attractive to investors.

As for market fundamentals, canceled warrant ratio for LME copper continued to fall, and the cash-to-three-month backwardation was also relatively low at USD 20-30/mt.

All these factors, combined with strong technical resistance, may trap copper price in the current range.

10% of industry participants remain pessimistic, holding that LME three-month copper will test support at USD 6,600/mt and SHFE copper will touch a low of RMB 47,200/mt. For one, despite dip buying, shorts have not closed positions in large amounts, and resistance at higher price levels still existed, meaning selling pressure may also drag down prices. For another, the recovering SHFE/LME copper price ratio and stronger influence of the Qingdao’s investigation will cause imported copper supply to rise further. The increasing supply and softening consumption with the start of low demand season will both hurt copper prices.