SMM Lead Market Daily Review (2014-6-30)

SHANGHAI, Jul. 1 (SMM) – Prices for the most active SHFE 1408 lead contract started last Friday’s night session at a high of RMB 14,180/mt, but later tracked LME lead prices down to the RMB 14,080-14,105/mt range. SHFE lead prices closed down RMB 20/mt at RMB 14,105/mt. During the night session, trading volumes for the most active contract totaled 562 lots, and positions lost 16 lots to 7,152 lots.

On Monday, SHFE lead prices initially rose to as high as RMB 14,130/mt, but pulled back to RMB 14,075/mt subsequently before ending down RMB 35/mt at RMB 14,090/mt. Trading volumes for the most active contract amounted to 1,542 lots, and positions shed 324 lots to 6,844 lots on Monday.

In the Shanghai physical lead market, goods from Chihong Zn & Ge were offered Monday at RMB 13,920-13,930/mt, but traded largely between RMB 13,890-13,900/mt at a RMB 210/mt discount over the most active SHFE 1408 lead contract. Nanfang resources were quoted at RMB 13,920-13,930/mt. Supply from Humon, Hanjiang and Shuangyan was sold at RMB 13,880/mt. Lead smelters didn’t sold off goods in the last trading day of June since no significant inflows were reported over the past month. Most downstream producers expressed little buying interest on Monday, pressured by tight cash flows, and only a small number of them increased purchases slightly at low prices.

A recent SMM survey shows that 67% of market insiders surveyed expect LME lead prices to hold flat at USD 2,150-2,200/mt and physical lead prices at RMB 13,850-14,000/mt for this week.

On the macroeconomic front, a series of economic reports, including China official manufacturing PMI for June, euro zone June CPI, and the interest rate decision by the European Central Bank, are all expected to be released this week. In the US, the ADP jobs report, nonfarm payrolls, ISM manufacturing PMI, as well as the University of Michigan’s consumer sentiment index, will also be made public. Following weeks of speculation, these economic reports are projected to give limited boost to base metals prices even if they come in positive this week.

Meanwhile, market participants should remain cautious given uncertainties surrounding turmoil in Ukraine and Iraq. On the market fundamental side, lead consumption in China is experiencing a seasonal low-demand period. In addition, technical indicators for LME lead prices are on a downward trajectory, but prices for zinc extracted from lead-zinc ores still have strong upward momentum. In China, lead supply is tight, but demand is also sluggish in the meantime. In this context, lead prices look set to hold steady this week.

20% of the respondents are bearish, expecting LME lead prices to fall to USD 2,130/mt and physical lead prices to 13,800-13,950/mt. They hold that the ongoing violence in Iraq and Ukraine is highly likely to weigh down base metals prices, as boost from positive macroeconomic news is fading out. In addition, lead prices are exposed to a potential technical correction in base metals prices this week, with several technical indicators being negative. In China, lead smelters will resume production in July after completing maintenance in June, which will increase market supply. Production at downstream lead-acid battery producers, however, will be hampered by towering finished goods stocks and tight liquidity, presaging weakening demand.

Nevertheless, the remaining 13% hold that LME lead prices will break above USD 2,190/mt and physical lead prices will rebound to the RMB 13,900-14,000/mt band this week. They based such a bullish view on China’s accommodative fiscal and monetary policies as well as recovering European and US economies. Another rally in prices is expected in the wake of a brief technical pullback. In China’s physical lead market, lead smelters should curtail deliveries as pressure from the cash squeeze at the end of June is decreasing, and downstream producers will ramp up purchases. These factors discussed above should combine to push up lead prices this week.