SMM Base Metals Weekly Price Review and Forecast (Oct. 20-24, 2014)

SHANGHAI, Oct. 21 (SMM) – The CBOE Volatility Index (VIX), a key measure of market expectations of near-term volatility, surged last week as dispiriting economic indicators from China, Europe, and the US raised concerns over the global economic outlook. As a result, European and US stocks slumped, and crude oil fell sharply. Gold rebounded against mounting risk aversion sentiment, but base metals declined across the board.

SMMI fell 1.97% last week, with SMMI.Ni down 6.58%, recording the biggest fall among base metals. LME nickel was down as much as 7.5%, prompting Jinchuan Group to cut ex-factory prices by a total of RMB 8,000/mt.

SMMI.Zn was down 2.59%. LME zinc fell below all major moving averages, down 5%, in the midst of broad sell-offs, but SHFE zinc was comparatively more resistant to declines. Zinc smelters on China’s physical markets refrained from selling last week, leaving high premiums. Hedging activity among traders was brisk last week.

SMMI.Al was down 2.27% last week. SHFE aluminum fell as bearish sentiment dominated the market, with positions down. Market participants on the physical market were reluctant to buy, putting a dent in aluminum prices.

SMMI.Cu and SMMi.Sn were down 1.5% and 1.27%, respectively. Physical copper trading was muted with sufficient supply in the market. LME tin fell for four trading days in a row, down from USD 20,000/mt to USD 19,000/mt. China’s spot tin prices dropped by RMB 2,000/mt even though Yunnan Tin Industry announced to cease production for routine maintenance for 15 days.

SMMI.Pb was down only 0.89% last week. China’s lead prices were resistant to declines since smelters and traders withheld goods from sale due to low finished goods inventories and difficulties in replenishing them.

Copper
SHFE copper prices rose early last week but met resistance at RMB 48,200/mt. The prices then dropped to RMB 46,350/mt and posted a 3.5% decline during the week. Trading volumes of SHFE copper contracts soared by 2.08 million lots, and holdings jumped by 60,000 lots. SHFE 1501 copper contract rolled over to the most active one last Friday.

SMM believes SHFE 1501 copper contract prices will move between RMB 46,300-47,300/mt this week.

China’s physical copper markets witnessed an inflow of imported copper after the SHFE/LME copper price ratio increased last week. Plus the influx of hedged goods, copper premiums narrowed. Some downstream buyers started purchasing after prices fell below RMB 48,000/mt, leading SMM to anticipate that physical trades will improve should SHFE copper manage to stabilize this week. Physical goods are expected to be offered at premiums of RMB 0-150/mt.

Aluminum
SHFE 1412 aluminum contract fared worse than LME aluminum last week. The most active contract rebounded early last week, but did not break through the 5-day moving average. Prices suffered three consecutive days of losses later in the week, falling to RMB 13,555/mt as investors cut bullish bets. In China’s spot market, SHFE 1411 aluminum contract shifted to the front-month contract on October 16. Downstream producers bought only as needed and pushed for lower prices. Traders also showed little buying interest. This caused spot discounts to widen to over RMB 50/mt over front-month contract.

This coming week, on the technical side, the most active SHFE aluminum contract should drop to RMB 13,500-13,650/mt. In China’s physical market, demand is unlikely to pick up, which will cause spot aluminum to trade at discounts of RMB 20-70/mt over SHFE front-month aluminum contract.

Lead
The SHFE 1411 lead contract tracked LME lead down around 2.4% to a record low of RMB 14,340/mt last week. Lead for December delivery on the Shanghai Futures Exchange became the most active contract on last Friday. The most active SHFE 1412 lead contract is still on a downward trajectory, but will stabilize around RMB 13,500/mt this week should LME lead stop falling.

Traded prices on China’s physical lead markets ranged between RMB 13,550-13,650/mt last week. Physical lead was in short supply since smelters in Henan and Yunnan refrained from selling while smelters in Hunan and Jiangxi had little in finished goods inventories. Traders were reluctant to sell due to low inventories and difficulties in replenishing them. At the same time, lead-acid battery producers were reluctant to buy after lead prices fell sharply last week.Spot lead prices are expected to hold steady at RMB 13,600-13,700/mt this week as supply and demand is reaching equilibrium. Lead smelters will be forced to sustain sales in light volumes to ensure sufficient cash flows even though they will suffer losses at current prices. Downstream producers are likely to buy only to need given uncertain macroeconomic conditions. Traders will sell in small quantities against low stocks. Lead supply in Shanghai will remain tight this week since deliverable goods should flock mostly to the Guangdong market.

Zinc
In China's spot markets, #0 zinc price drop was not as significant as SHFE zinc price, causing spot premiums against SHFE 1412 zinc contract prices to expand from RMB 180-240/mt to RMB 300/mt. Smelters held back from selling on slumping zinc prices, but traders still having arbitrage opportunities moved goods actively. When combined with shipments arriving from south China, Shanghai's supply tightness improved. Downstream buyers entered the market as zinc prices fell below RMB 17,000/mt, causing overall transactions to improve.

Smelters will hold onto their goods at lower prices this week, while traders will sell enthusiastically due to arbitrage opportunities. When combined with goods releases after delivery, supply tightness will mitigate. Downstream buying interest will increase as zinc prices stabilize at low levels, with spot premiums against SHFE three-month zinc contract prices remaining between RMB 250-350/mt.

Tin
Tin prices in Shanghai spot market followed LME tin down in the week ending October 17. The average price fell from RMB 138,500/mt to RMB 136,750/mt. Mainstream traded prices dropped to RMB 135,000-137,500/mt last Friday. Consumption was sluggish during the first half of the week. Some downstream producers entered the market last Thursday, attracted by low prices. 15-day production halts at Yunnan Tin Group for maintenance did help prevent prices from falling dramatically, though. Large smelters held offers between RMB 137,500-138,000/mt last Friday.

Nickel
In China’s spot nickel market, the average price for SMM #1 refined nickel tumbled RMB 3,850/mt on a weekly basis to RMB 110,400/mt last week. Jinchuan Group cut nickel prices three times by a total of RMB 8,000/mt to close the week at RMB 106,500/mt. Traders were anxious to sell out of bearishness. Inquiries from downstream producers increased after nickel prices plunged, but trading was thin. Supply of Russian nickel was tight. Downstream producers purchased Russian nickel at RMB 200/mt below Jinchuan nickel, while traders bought Russian nickel at RMB 500/mt below Jinchuan nickel.

This coming week, nickel prices in China’s spot market are expected to follow LME nickel down to RMB 104,500-112,000/mt.