SMM Base Metals Market Daily Review (2014-8-18)

SHANGHAI, Aug. 19 (SMM) – 

 

The most active SHFE 1410 copper contract rose above the RMB 49,000/mt mark after starting last Friday’s night session at RMB 48,850/mt, and closed up RMB 220/mt at RMB 49,050/mt. During the night session, trading volumes for the most active contract fell slightly to some 90,000 lots, and positions gained by 3,180 lots.

 

On Monday, SHFE copper rose further to RMB 49,100/mt, meeting resistance at RMB 49,230/mt, but fell at the tail of the trading to end up RMB 140/mt, or 0.29%, at RMB 48,970/mt. Trading volumes for the SHFE 1410 copper contract shrank by 87,960 lots, and positions contracted by 3,672 lots. The price of the red metal should test base support in the near term, with negative technical indicators.

 

In the Shanghai physical market, copper was offered Monday at a RMB 80-160/mt premium over the SHFE 1409 copper contract. Traded prices were RMB 49,480-49,500/mt for standard-quality copper and RMB 49,480-49,580/mt for high-quality copper.

 

As SHFE copper prices rebounded, cargo holders quoted high-quality copper at as high as a RMB 250/mt premium, but no transactions were reported. Quotations for hydro-copper and standard-quality copper were close to those for high-quality copper. Middlemen evinced moderate buying interest, while downstream producers barely entered the market, holding that the rebound in copper prices will be short-lived. Trading activity was moderate at low prices on Monday. Physical copper premium is likely to fall further for the foreseeable future.

 

As copper prices fell slightly during the afternoon trading session, some middlemen entered the market to buy while building short positions on the futures market. Helped by decreasing supply, copper was offered at a higher premium of RMB 120-200/mt, with transactions done mostly by middlemen.

42% of market players contacted by SMM are pessimistic about this week’s copper prices due to lousy European data which exerted a drag on the euro and strong technical pressures.

 

In physical copper markets, downstream buyers remained unwilling to buy during the offseason. On the supply front, China’s refined copper output increased 1.6% on the month and 16.5% year-on-year in July after completion of smelting facility maintenance. In addition, larger quantities of imported copper are flowing into Chinese domestic markets due to the higher SHFE/LME copper price ratio. The weak market fundamentals will also weigh down prices. Thus, many expect LME copper prices to test support at USD 6,800/mt and SHFE copper prices to slip to RMB 48,500/mt.

 

38% of industry insiders predict LME copper prices will remain at USD 6,820-6,900/mt and SHFE copper prices will be RMB 48,800-49,200/mt, citing mixed data from the US and narrowing moving range for gold and crude oil prices. In addition, risk aversion arising from geopolitical tensions will leave investors cautious.

 

The remaining 20% expect a rebound in copper market this week with LME copper climbing above USD 6,950/mt and SHFE copper prices rising above RMB 49,500/mt, due partly to falling copper stocks reported by LME and SHFE. The CFTC report indicated a rise in net long positions to 7,506 lots for the week ending August 5. LME reported that bullish bets accounted for 22% of total for the week ending August 8.

 

On the other hand, the US dollar index is expected to meet strong technical resistance, so any potential decline in the US dollar index will lend support to copper prices.

 

In China, rumors swirled that one bank in Shanghai may loosen control over issuance of mortgage. Shanghai will be the first mega city in China to relax restrictions on house purchases should the rumors turn out true, and other large cities may follow suit. This caused market players to guess the central government will adjust macroeconomic policies in the second half of the year. That being said, anticipation for interest rate cuts waned as market showed some positive signs following the modest stimulus. These reports did give a boost to China’s stock market, which will benefit the commodity market. 

 

Aluminum      

Last Friday night, SHFE 1410 aluminum contract started lower at RMB 13,930/mt before going up to finish the night session at RMB 14,025/mt. Trading volumes totaled 49,892 lots, with positions up 4,102 lots to 131,648 lots. 

 

On Monday, the most active contract hit a ceiling after touching at RMB 14,070/mt, and ended at RMB 14,025/mt. Trading volumes totaled 87,944 lots, with positions down 4,082 lots to 127,566 lots. The tense struggle between longs and shorts is expected to keep the light metal hovering around RMB 14,000/mt in the near term.  

 

Spot aluminum largely traded at RMB 14,000-14,010/mt in Shanghai on Monday, a discount of RMB 20-30/mt over SHFE 1409 aluminum contract, versus RMB 14,040-14,050/mt in Wuxi and RMB 14,010-14,020/mt Hangzhou. Tight supply in Wuxi allowed local cargo holders to ask for higher prices. Sellers in other regions followed suit, holding offers firm above RMB 14,000/mt. Higher offers cooled buying. In the afternoon, sellers held offers unchanged even after SHFE 1409 aluminum fell, with few deals done.

 

SMM’s survey of 40 large aluminum smelters and traders in China reveals the following results: 

 

40% of those surveyed are bullish that spot aluminum prices will rise above RMB 14,030/mt this week. First, LME aluminum is expected to rise to USD 2,010-2,050/mt as capital did not flow out. Second, the most active SHFE aluminum contract is poised to move higher to RMB 14,050-14,150/mt as investors did not close long positions aggressively. Third, falling aluminum stocks will encourage sellers to hold offers firm. 

 

Another 50% see spot aluminum prices hovering around RMB 14,000/mt. First, LME aluminum and SHFE 1410 aluminum contract will meet resistance at the upper end, but have found support at the bottom, with prices expected between USD 1,970-2,010/mt and RMB 13,880-14,050/mt, respectively. Second, downstream consumption in domestic spot markets will remain stable. 

 

The remaining 10% are worried that bearish technical indicators will send LME aluminum and the most active SHFE aluminum contract down. Spot aluminum prices are likely to fall below RMB 13,980/mt.   

 

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.

 

SHFE 1410 zinc contract prices opened at RMB 16,380/mt last Friday evening, then touching RMB 16,465/mt with rising LME zinc prices, and closing at RMB 16,465/mt, up RMB 30/mt or 0.18%. Trading volumes decreased by 115,332 to 218,632 lots, and total positions grew by 1,782 to 239,676 lots.

SHFE 1410 zinc contract prices opened at RMB 16,465/mt on Monday, and fluctuated between RMB 16,430-16,500/mt, and closed at RMB 16,450/mt, up RMB 15/mt or 0.09%. Trading volumes decreased by 166,238 lots, to 401,312 lots, and total positions decreased by 6,142 lots to 233,534 lots. SHFE 1410 zinc contract prices are expected to fall further this evening due to falling LME zinc prices.

 

#0 zinc prices were between RMB 16,480-16,510/mt, with spot premiums between RMB 20-40/mt above SHFE 1410 zinc contract prices. #1 zinc prices were between RMB 16,440-16,470/mt. SHFE 1410 zinc contract prices were flat with last Friday’s levels, with spot premiums between RMB 20-40/mt. Supply from smelters was limited as some of them have just restarted production, but traders sold actively, leaving goods available sufficient. As downstream buying interest improved, transactions were brisk. Shuangyan branded #0 zinc prices were RMB 16,490-16,510/mt, with RMB 16,480-16,490/mt for Yuguang, Qinxin, Feilong and Qilin zinc. KZ #0 zinc was traded between RMB 16,460-16,480/mt. SHFE 1410 zinc contract prices failed to stand at the RMB 16,500/mt in the afternoon then fell back. As SHFE zinc prices experienced corrections in the afternoon, cargo holders held goods, causing trading to decrease, with premiums between RMB 20-50/mt, and #0 zinc prices mainly between RMB 16,480-16,510/mt.

 

LME zinc prices were down 0.63% last week. With regard to zinc price trends this week, SMM undertook a survey of 30 market participants and found that 43% are neutral, believing LME zinc prices will hover between USD 2,255-2,305/mt, and SHFE 1410 zinc contract prices will fluctuate between RMB 16,300-16,650/mt. LME zinc prices should find support at the 60-day moving average but meet resistance at the 10-day moving average. In China’s spot markets, spot premiums of #0 zinc against SHFE 1410 zinc contract prices will be RMB 0-50/mt, which will deter trader operations. When combined with sluggish downstream demand, zinc prices will move sideways.

 

30% are bullish, thinking LME zinc prices will rebound to USD 2,330/mt, and SHFE 1410 zinc contract prices will rise to RMB 16,800/mt. They believe LME zinc prices have dropped by 6% over the past two weeks. Combined with deteriorating zinc supply tightness, spot zinc prices should jump to RMB 16,800/mt.

 

27% are bearish. They see LME zinc prices dipping to USD 2,235/mt, and SHFE 1410 zinc contract prices are expected to fall to RMB 16,150/mt, with spot premiums of RMB 50/mt. US July CPI and August manufacturing index from Philadelphia Fed slated for release this week are pessimistic due to sluggish US July retail sales and the number of initial jobless claims last week. Euro zone major economic data released recently are also downbeat, so data scheduled for release this week are expected to be negative. In addition, LME zinc inventories have grown by 80,000 mt since August. This, combined with restarts at domestic zinc smelters in August, will drag down zinc prices. 

 

 In Shanghai spot tin market, mainstream traded prices rose RMB 500/mt to RMB 140,500-142,000/mt on Monday. Weak LME tin prices drove downstream producers in domestic tin markets to the sidelines. However, falling supply helped spot tin prices rise slightly. 

 

Half of the market players surveyed by SMM see spot tin prices in China stable between RMB 140,500-142,000/mt this week. They expect LME tin prices to consolidate, offering no guidance for tin prices in China. Besides, supply and demand in domestic spot tin market are likely to remain stable, keeping tin prices steady as well. 

 

Another 30% are bearish for two reasons. First, on the technical side, LME tin is on track to fall. Second, downstream demand in China will remain slack, with a few SMEs reporting fewer orders in August. 

 

The remaining 20% are bullish that LME tin prices will drift higher and that tight supply in domestic markets will push spot tin prices in China up. 

 

 Nickel   

SMM #1 nickel prices were between RMB 129,900-130,200/mt. Traders took a wait-and-see posture, with traded prices between RMB 129,900-130,200/mt. Prices of 1409 nickel contracts on the Wuxi electronic trading dipped to RMB 129,650/mt in the afternoon, with transactions quiet and traded prices between RMB 129,500-129,900/mt. End-users demand remained soft.

 

With regard to nickel price trends this week, SMM surveyed 36 market players and found that 72% believe LME nickel prices will hover between USD 18,500-18,800/mt. LME nickel prices lack momentum to rise, but Russian nickel availability was low due to China’s probe in to finance scam at the Port of Qingdao and import losses. This caused the price spread between Russian nickel and Jinchuan nickel to narrow, as low as RMB 200/mt. When combined with firm spot nickel prices, LME nickel prices should resist both increases and declines.

 

17% believe LME nickel prices should rise to USD 18,800-19,000/mt. Improving end-user demand, combined with rising NPI prices, will lend support to nickel prices.

 

11% are bearish, believing LME nickel prices will fall to USD 18,300-18,500/mt. LME nickel inventories broke through 320,000 mt to 325,000 mt, with growth mainly at Malaysia’s Johore warehouse, meaning China is delivering goods to the LME. In the meantime, the commissioning of blast furnaces in Indonesia also depresses market confidence. In addition, HSBC’s August PMI for China will be announced this week, which is expected to be pessimistic due to downbeat major economic data for July.