SMM Base Metals Market Daily Review (2014-7-21)

SHANGHAI, Jul. 22 (SMM) –

Copper
The most active SHFE 1409 copper contract dipped to a low of RMB 49,190/mt after starting last Friday at RMB 49,580/mt. Prices for the contract later erased some losses to close down RMB 550/mt at RMB 49,370/mt, boosted by bargain-hunting. During the night session, trading volumes for the most active contract were around 220,000 lot, and positions gained by 10,204 lots.

On Monday, SHFE copper prices advanced to as high as RMB 49,650/mt, and finished down RMB 370/mt, or 0.74% at RMB 49,540/mt. Trading volumes for the SHFE 1409 copper contract added by 78,232 lots, and positions fell by 4,684 lots.

In the Shanghai physical market, copper was offered Monday between a RMB 120/mt discount and a RMB 30/mt premium over the SHFE 1408 copper contract. Traded prices were RMB 49,730-49,850/mt for standard-quality copper and RMB 49,800-49,930/mt for high-quality copper. SHFE copper prices fell sharply on Monday, while physical copper prices also dropped below the RMB 50,000/mt mark. In response, large quantities of copper for arbitrage and deliverable goods flowed out, significantly increasing market supply. Premiums for physical copper narrowed and look set to fall further in the short term. Hydro-copper was quoted at a RMB 170/mt discount by the midday. After LME copper price sank below the USD 7,000/mt mark, middlemen barely entered the market on fears that prices may fall. Downstream producers were relatively cautious buying, with sluggish trading activity on Monday.

Although SHFE copper prices steadied during the afternoon trading session, most cargo holders continued to move goods at higher discounts. Physical copper was offered largely at a RMB 20-120/mt discount and traded at RMB 49,720-49,900/mt. Some middlemen entered the market to buy low-priced goods, but trading activity remained sluggish on Monday.

SMM’s latest survey shows 43% of participants in copper industry believe LME copper will fall below USD 6,950/mt and SHFE copper prices will test support at RMB 49,000/mt this week. The crash of Malaysia Airlines passenger plane will continue to dampen trading activity. In China, most investors are buying zinc while selling copper, placing great downward pressure on copper prices. Furthermore, the potential default of China’s construction firm Huatong Road & Bridge Group also deals a blow to China’s market.

Technically, both LME and SHFE copper dropped below the 20-day moving average, leaving prices under resistance. In China’s physical copper market, hedged goods started flowing into the market after copper prices fell below RMB 50,000/mt, with oversupply pressure mounting. Meanwhile, demand downstream shows no substantial improvement. In this context, copper discounts expanded, which will add to a drag on SHFE copper prices.

The remaining 57% of industry insiders expect LME copper to hover at USD 7,000/mt and SHFE copper to remain stable at RMB 49,500/mt. These players are optimistic about the US durable goods orders and China’s PMI due out this week. In addition, US shares are still on the way up despite recent negative news, which is believed to lend support to commodity markets. The US dollar index mainly hovering around the 5-day moving average lately may also leave copper prices in the current trading range. 

Aluminum     
Last Friday night, SHFE 1409 aluminum contract slid to RMB 13,785/mt after starting at RMB 13,830/mt, but then rallied to finish the night session at RMB 13,875/mt. Trading volumes totaled 47,294 lots, with positions up 1,642 lots to 134,166 lots. 

On Monday, the most active contract jumped to RMB 14,040/mt before closing at RMB 13,995/mt. Trading volumes totaled 96,560 lots, with positions up 7,586 lots to 141,812 lots. With investors opening long positions, prices are on track to challenge resistance at RMB 14,000/mt tomorrow.

Spot aluminum largely traded between RMB 13,860-13,890/mt in Shanghai on Monday, a discount of RMB 70-100/mt over SHFE 1408 aluminum contract. Mainstream traded prices were RMB 13,890-13,920/mt in Wuxi and RMB 13,900-13,920/mt in Hangzhou. SHFE aluminum for August delivery jumped to RMB 13,900/mt, sending spot aluminum prices up by around RMB 100/mt. Traders scrambled to buy out of bullishness, while downstream producers took a wait-and-see stance. In the afternoon, offers remained unchanged, with small volumes of transactions done between traders.

SMM’s recent survey of 34 large aluminum smelters and traders in China reveals the following results:

71% of the market players surveyed are bullish that spot aluminum prices will rise to RMB 13,900-14,000/mt this week for two reasons. First of all, the most active SHFE aluminum contract has built upward momentum as longs entered the market aggressively, with prices expected between RMB 13,900-14,050/mt. Second, few arrivals will allow cargo holders in physical markets to ask for higher prices.

The remaining 29% see spot aluminum prices little changed between RMB 13,850-13,900/mt. These markets players understand that SHFE 1409 aluminum contract may face downward correction following sharp gains, moving within RMB 13,750-13,950/mt. Buyers in spot markets will shy away from higher offers, preventing traded prices from rising.

Lead
The most active SHFE 1408 lead contract started last Friday’s night session lower at RMB 14,020/mt, and ended down RMB 65/mt at RMB 13,990/mt, with only 10 lots traded.

On Monday, SHFE lead prices hovered largely around RMB 14,070/mt, but fell at the tail of the trading to close down RMB 15/mt at RMB 14,040/mt. Trading volumes for the SHFE 1408 lead contract were 170 lots, and positions were off 116 lots to 5,678 lots.

In the Shanghai physical lead market, goods from Chihong Zn & Ge and Nanfang traded Monday at RMB 13,980-13,990/mt, a RMB 90/mt discount over the most active SHFE 1408 lead contract. Supply from Humon was sold at RMB 13,940-13,950/mt. Lead smelters reduced deliveries on bullish sentiment after physical lead prices rose continuously, with Humon brand dominating the market among lead smelters. Traders were unwilling to sell due to low inventories and were actively buying. Downstream producers in Jiangsu, Zhejiang, and Anhui are expected to purchase raw material in other regions since prices in Shanghai were comparatively higher, leaving trading muted. Trading activity across China, however, picked up as downstream producers expressed higher buying interest on Monday.

A recent SMM survey of 30 industry insiders shows that those surveyed are split on lead price movements for this week.

Half of respondents are bullish, expecting LME lead prices to rise to USD 2,230/mt and physical lead prices to climb to 13,900-14,050/mt. Investors should pay special attention to the University of Michigan’s consumer sentiment index for July, US June existing home sales and durable goods orders growth this week. PMIs from China, the euro zone, and other major countries are expected to come in positive on Thursday, lending further support to base metals. Zinc and aluminum will fare relatively better than other base metals this week. Prices for lead, extracted from lead-zinc ores, will remain on an upward trajectory. Trading volumes and positions for LME lead prices both rose last Friday, a sign of increasing buying forces.

Tight lead concentrate supply slowed deliveries from smelters, while rising temperatures also are hampering production, both directly reducing market supplies. On the demand side, downstream producers preferred to buy raw material in advance on hopes of price rises despite still lackluster end-consumer consumption, which should boost lead prices this week.

30% of these market participants, however, hold that LME lead prices will fall to USD 2,160/mt this week even though physical lead prices should hold firm at RMB 13,850-13,950/mt. Slightly better-than-expected economic reports from China and the US have failed to bolster base metals markets appreciably. A series of technical indicators also are negative for lead prices, presaging a correction in lead prices on the horizon. On the fundamental point of view, lead smelters have resumed production in July after ending maintenance in June, helping increase lead supply. Meanwhile, downstream producers are expected to cut lead ingot purchases since their production will be disrupted by high temperatures in summer as usual. In this context, lead prices look set to drop this week.

The remaining 20% believe that LME lead prices will hold steady at USD 2,181-2,210/mt and physical lead prices at RMB 13,900-14,000/mt this week. LME lead prices will hover largely around current levels and wait for further guidance from zinc prices, with positions, inventories and cash-to-three-month price spread all not supporting a rise. In addition, lackluster end-consumer demand and decreasing lead supply on shortages of lead concentrate should combine to trap prices in current levels. 

Zinc
SHFE 1409 zinc contract prices opened at RMB 16,575/mt last Friday evening, then moved between RMB 16,510-16,590/mt. Near the end of trading, SHFE 1409 zinc contract prices hovered around RMB 16,615/mt and closing at RMB 16,625/mt, down RMB 30/mt or 0.18%. Trading volumes increased by 59,662 lots, to 206,000 lots, and total positions increased by 3,494 lots to 244,370 lots. SHFE 1409 zinc contract prices opened at RMB 16,625/mt on Monday, dipping to RMB 16,580/mt in the morning before rising due to the entrance of bargain hunters. Near the end of trading in the morning, SHFE 1409 zinc contract prices touched RMB 16,705/mt, and fluctuated between RMB 16,640-16,690/mt in the afternoon, touching an intraday high of RMB 16,755/mt, and closing at RMB 16,705/mt, up RMB 50/mt or 0.3%. Trading volumes decreased by 12,968 lots, to 244,518 lots, and total positions of SHFE 1409 zinc contracts decreased by 9,554 lots to 234,816 lots.

#0 zinc prices were between RMB 16,610-16,660/mt, with spot discounts of RMB 40-20/mt against SHFE 1409 zinc contract prices. #1 zinc prices were between RMB 16,600-16,620/mt, and with transactions made as low as RMB 16,600/mt in the morning. SHFE 1409 zinc contract prices rose to RMB 16,650-16,700/mt, level with  last Friday’s. but goods arriving were limited, especially Shuangyan and Yuguang brand zinc, keeping spot zinc prices firm and with spot discounts narrowing. Transactions were muted and mainly made among traders due to weak downstream buying interest.
Shuangyan branded #0 zinc prices were RMB 16,630-16,660/mt, and Yuguang, Huize and Qinxin brand #0 zinc prices were between RMB 16,620-16,650/mt. Prices for SMC and Baohui brand zinc were between RMB 16,610-16,630/mt and RMB 16,580-16,600/mt for other imported zinc. SHFE zinc prices touched RMB 16,755/mt in the afternoon, and #0 zinc prices were between RMB 16,630-16,680/mt, with spot discounts of RMB 40-10/mt.

LME zinc prices remained high last week, despite slower gains. With regard to zinc price trends this week, SMM surveyed 30 market players and found that 40% are bullish, believing LME zinc prices will continue to soar to USD 2,340/mt, and SHFE 1409 zinc contract prices will rise to RMB 17,000/mt. US June CPI and HSBC’s July manufacturing index for China will be released this coming week. Better-than-expected US CPI and PPI in May point to a recovery in US economy, and the Beige Book released last week revealed US household spending also grew, boding well for US June CPI. China’s Q2 GDP was upbeat, and the growth in value-added at China’s scale efficient industries in June hit a record high for the year, also causing market optimism toward HSBC’s July manufacturing index for China to increase. When combined with MMG’s announcement that it lowered its zinc concentrate output target for the year and the Century mine will run out of resources in 2015, long momentum will strengthen, boosting zinc prices to rise further. Supply from some smelters will be limited due to maintenance, and trading goods will be also insufficient, giving support to spot zinc prices and causing spot discounts to narrow to RMB 0/mt against SHFE 1409 zinc contract prices.

37% are neutral, seeing LME zinc prices move between USD 2,275-2,320/mt, and SHFE 1409 zinc contract prices will fluctuate between RMB 16,550-16,800/mt. The US dollar index hovered around 80.5 recently, resisting both increases and declines, so LME zinc prices will have little room to rise or fall. Spot zinc prices in Shanghai will move between RMB 16,550-16,750/mt.

23% are pessimistic, believing LME zinc prices will fall to test support from USD 2,250/mt, and SHFE 1409 zinc contract prices will drop to RMB 16,300/mt. Geopolitical tensions will push up risk aversion, when combined with the onset of the low-demand season for zinc in China, spot zinc prices will fall to RMB 16,350/mt.

Tin
In Shanghai physical tin market, mainstream traded prices rebounded to RMB 138,000-140,000/mt on Monday. Demand picked up slightly, allowing prices to stage a mild rally.

60% of the market players surveyed by SMM expect tin prices in Shanghai to hold largely stable between RMB 138,000-140,000/mt this week. On the supply side, some smelters are conducting facility maintenance, cutting into goods available for sale. On the demand side, soldering industry has entered its offseason, depressing demand for tin. In this scenario, tin prices will probably remain stable.

Another 25% are worried that weak LME tin and lackluster demand in China will weigh domestic tin prices down.

The remaining 15% are bullish that falling supply in China will drive tin prices up.

Nickel  
SMM #1 nickel prices were quoted between RMB 126,400-127,000/mt. Jinchuan nickel prices were between RMB 126,600-126,700/mt in the morning, and Russian nickel prices were between RMB 126,000-126,100/mt. Jinchuan nickel prices edged up to RMB 127,400-127,500/mt. Market players lacked confidence as LME nickel prices plunged last Friday, with transactions muted and mainly made in the morning. End-users stay on the sidelines due to the slow season.

With regard to nickel prices this week, SMM surveyed 36 market players and found that 56% are pessimistic, see LME nickel prices move between USD 18,000-18,600/mt, and falling to as low as USD 17,800/mt. LME nickel inventories grew 3,738 mt last week to 311,088 mt. In addition, it was reported two companies in Indonesia exported lead and zinc concentrate for the first time since January, triggering market concern that Indonesia will loosen nickel ore exports in the forms of levying tax and setting quotas.

44% believe LME nickel prices will move between USD 18,500-18,800/mt. They think Indonesia will not reverse its ban on the exports of unprocessed ore anytime soon. A news resource said only nickel products with nickel grade above 4% are allowed to be exported. LME nickel prices plummeted last Friday, but will rally this week.