SMM Lead Market Daily Review (2014-8-18)

SHANGHAI, Aug. 19 (SMM) – The most active SHFE 1410 lead contract followed LME lead up after starting last Friday’s night session at RMB 14,420/mt, and closed up RMB 85/mt at RMB 14,505/mt.

On Monday, base metals prices on the Shanghai Futures Exchange fell back following a sharp rally as markets continued to digest concern over the global economy and intensifying geopolitical strains. SHFE lead fell initially to RMB 14,400/mt, and then hovered around RMB 14,450/mt before ending up RMB 25/mt at RMB 14,445/mt. Trading volumes for the SHFE 1410 lead contract totaled 24,466 lots, and positions decreased 462 lots to 32,302 lots. The price of the soft metal is expected to trade in ranges in the near term amid mixed technical indicators.

In the Shanghai physical lead market, goods from Chihong Zn & Ge traded Monday at RMB 14,320-14,340/mt, a RMB 120/mt discount over the most active SHFE 1410 lead contract. Traded prices were RMB 14,310/mt for Tongguan brand, and RMB 14,290-14,300/mt for Hanjiang and Humon brands. After lead prices fell recently, most downstream producers were reluctant to buy, while Humon, Tongguan and Hanjiang all moved goods on growing finished goods inventories. Traders were actively moving goods since they considered the price gap between SHFE and physical lead favorable for arbitrage. Downstream producers stayed out of the market as spot lead traded at a premium over SMM #1 lead, leaving trading muted on Monday.

SMM recently has conducted a survey of 30 industry insiders on lead price movements for this week. It turns out that 43% of the surveyed expect LME lead to hold flat at USD 2,200/mt and spot lead at RMB 14,300/mt.

A series of economic reports, including US housing data, PMIs from China and the euro zone, as well as the US Federal Reserve’s minutes from its most recent meeting, will be released this week. These economic releases will put a dent in market appetite should they come in negative, while the US Fed’s minutes will raise expectations for an interest rate hike. Investors thus will stay in a cautious mood this week.

LME lead is now facing upward resistance, but also has found base support. Meanwhile, the most active SHFE 1410 lead contract has already fallen by 7% from a high of RMB 15,510/mt, in relation to a mere 4% drop in LME lead. As such, there will be limited downside room in SHFE lead this week, and spot lead prices will hover largely around RMB 14,300/mt.

40% of respondents hold that LME lead will fall to USD 2,170/mt and spot lead will drop to a RMB 14,200-14,300/mt band this week. Economic data from China, the US and the euro zone should come in worse than expected, which will compound concern over global economic recovery. The US Fed is likely to raise interest rates in the minutes due for release this week, hurting market sentiment. The US dollar index looks set to rise as the geopolitical crisis in Ukraine is escalating. The negative economic news will not bode well for LME lead.

In China, motive and ignition lead-acid battery markets both are witnessing weak performance. As price wars among motive battery producers are intensifying and battery prices are persistently low, an increasing number of small and medium-size producers will face closure or output cuts. Battery producers will substitute secondary lead for primary lead to curtail loss should the price gap between SMM #1 and secondary lead hover above RMB 400/mt. The resultant less demand for primary lead will restrain prices this week.

The remaining 17% believe that spot lead prices will rebound slightly to RMB 14,400/mt thanks to positive technical indicators and increasing cash flows. The Chinese government has recently injected liquidity through a variety of monetary policies including targeted reserve requirement ratio (RRR) cuts and pledged supplementary lending (PSL), which will help boost base metals prices this week.