SMM Base Metals Market Daily Review (2014-10-27)

SHANGHAI, Oct. 28 (SMM) –

Copper
The most active SHFE 1501 copper contract started last Friday’s night session at RMB 47,430/mt, meeting resistance at RMB 47,500/mt. The price of the red metal slipped to RMB 47,200/mt, and ended down RMB 30/mt at RMB 47,250/mt. During the night session, trading volumes for the most active contract totaled some 130,000 lots, and positions added by 3,090 lots.

SHFE copper dipped as low as RMB 46,980/mt, and finished down RMB 230/mt, or 0.49%, at RMB 47,050/mt. Trading volumes for the SHFE 1501 copper contract expanded by 25,408 lots, and positions increased by 28,886 lots.

Physical copper in Shanghai was quoted Monday between a RMB 60/mt discount and a RMB 20/mt premium. Traded prices were RMB 47,800-47,860/mt for standard-quality copper and RMB 47,820-47,920/mt for high-quality copper.

As SHFE copper leveled off on Monday, cargo holders ramped up sales to increase cash flows, leaving abundant supply in the market. After the SHFE/LME copper price ratio fell, hydro-copper cargo holders refrained from selling at high discounts, capping downside room in physical discounts. As a result, the prices of different copper brands are essentially the same. Middlemen barely entered the market due to liquidity shortfalls, while downstream producers bought only to need in light volumes, leaving trading activity quiet on Monday.

As SHFE copper slipped further during the afternoon trading session, physical copper was quoted between a RMB 50/mt discount and a RMB 10/mt premium, and traded lower at RMB 47,750-47,830/mt. The market was in oversupply on Monday, with rare inquiries reported.

41% of market players polled by SMM believe LME copper will remain in the USD 6,600-6,700/mt range and SHFE copper will still move between RMB 46,800-47,500/mt this week.

Although the US dollar index met resistance at 86, support at 85.3 is solid. Meanwhile, copper trades in China will remain modest, but the lower SHFE/LME copper price ratio may undermine interest in importing activities.

Technically, LME copper still lacks impetus to rebound, while support at lower levels has strengthened, so the prices may remain range-bound.

44% of industry insiders surveyed by SMM expect LME copper to fall to USD 6,580/mt and SHFE copper to drop to RMB 46,500-46,800/mt this week.

The European Central Bank conducted stress test on 30 top banks in the euro zone, and 25 failed to pass the test. The test result raised anticipation that the central bank will impose more easing policies, presaging a weaker euro.

In China, 12 new stocks will start trading this week, and RMB 700 billion are expected to be frozen, placing pressure on the market. In addition, China’s refined copper output hit a new high this year, while the September imports also posted noticeable increase. On the demand side, home sales and housing starts both declined, and growth of electric power investment for the whole year will be slower than expected. These negative factors, combined with tight finances by the end of the month which will prompt cargo holders to step up selling, will exert a drag on copper prices.

The remaining 15% of investors, however, are still optimistic, arguing that bright data from the US will bolster copper prices. The US housing and job data were reported upbeat, allowing the Dow to close up 2.6% last week, and the Nasdaq ended 5.3% higher. The S&P 500 posted a 4.1% rise.

Furthermore, China’s railway investment will accelerate in the final quarter of the year so that it will achieve its railway construction and investment goals this year. Thus, some believe copper demand will be buoyed. As a result, a few investors predict LME copper will rise above USD 6,700/mt and SHFE copper will advance to RMB 47,500-47,800/mt.

Aluminium
Last Friday night, SHFE 1412 aluminum contract was range-bound after starting at RMB 13,730/mt, and finished the night session at RMB 13,765/mt. Trading volumes totaled 7,208 lots, with positions down 314 lots to 95,828 lots.

On Monday, falling home prices in China’s medium and large cities continued to dampen market sentiment. As a result, the most active contract continued to hover below the daily moving average and closed at RMB 13,745/mt. Trading volumes totaled 15,180 lots, with positions down 2,342 lots to 93,486 lots. Prices are expected to be range-bound for the short term.

Spot aluminum largely traded at RMB 13,580-13,590/mt in Shanghai on Monday, discounts of RMB 110-120/mt over SHFE 1411 aluminum contract, versus RMB 13,570-13,580/mt in Wuxi and RMB 13,600-13,610/mt in Hangzhou. Sellers refrained from selling against large spot discounts, while buyers watched from the sidelines. In the afternoon, offers were unchanged, with sparse transactions reported.

34 Chinese aluminum smelters and traders surveyed by SMM are split over aluminum price movements this week.

59% of those surveyed see aluminum prices to hold stable: (i) LME aluminum has found support at moving averages and will stabilize between USD 1,950-1,990/mt; (ii) the most active SHFE aluminum contract is also expected to consolidate between RMB 13,700-13,850/mt; (iii) in China’s domestic market, downstream consumption will remain sluggish, but sellers will hold back goods at lows, allowing spot aluminum prices to hold steady between RMB 13,580-13,620/mt.

Another 29% hold bearish views: (i) LME aluminum may decline to USD 1,910-1,950/mt due to negative technical indicators and a possible rise in the US dollar index on fear of interest rate hike by the US Fed; (ii) technical indicators imply that the most active SHFE aluminum contract may fall to RMB 13,600-13,750/mt; (iii) in domestic spot market, month-end cash crunch will depress buying interest, which will bring spot aluminum prices down below RMB 13,580/mt.

The remaining 12% are optimistic: (i) surprisingly positive PMIs in China and the euro zone will boost risk appetite and push LME aluminum up to USD 1,980-2,020/mt; (ii) falling bauxite shipments from Guinea due to the Ebola outbreak will also lend some support to aluminum prices; (iii) suppliers in China’s domestic market will hold back goods at lows, which will help drive spot aluminum prices up above RMB 13,620/mt.

Lead
Lead for December delivery on the Shanghai Futures Exchange, the most active contract, opened last Friday’s night session at RMB 13,655/mt, and then retreated to finish down RMB 35/mt, or 0.26% at RMB 13,620/mt.

On Monday, SHFE lead hovered mostly at RMB 13,595-13,620/mt, and closed down RMB 40/mt, or 0.29%, at RMB 13,615/mt. Trading volumes for the SHFE 1412 lead contract shrank 32 lots to 984 lots, but positions gained 6 lots to 9,084 lots.

Chihong Zn & Ge brand was quoted Monday at RMB 13,660/mt, a RMB 60/mt premium to the most active SHFE 1412 lead contract, but was rarely sold. Traded prices were RMB 13,640-13,650/mt for Chengyuan and Nanfang brands, RMB 13,640/mt for Humon brand, and RMB 13,620-13,630/mt for Tongguan brand. Quotations were firm on Monday, but downstream producers were reluctant to buy, out of fears that prices may fall. Trading activity was extremely light on Monday.

A recent SMM survey of 30 industry insiders shows that only 7% of respondents are bullish, expecting LME lead to rise to USD 2,000-2,030/mt and spot lead to edge up to RMB 13,650-13,750/mt this week.

The narrowing LME cash-to-three-month contango points to robust demand in US markets, while LME lead positions have fallen to 117,000 lots, indicating a lack of selling force. In addition, technical indicators are positive for LME lead, and prices are now oversold. As such, lead prices are highly likely to rise this week.

66% of these industry insiders polled by SMM hold that LME lead should hold flat at USD 1,985-2,015/mt and spot lead at RMB 13,600-13,700/mt this week. The US Federal Reserve is expected to exit the quantitative easing (QE) in this week’s policy meeting and will discuss the timing of an interest rate hike. Several Fed officials stated earlier that it is still too early to raise interest rates due to mixed economic indicators even as the US economy is recovering gradually. The policy meeting is forecast to stoke panic among market participants, but risk appetite should grow following the meeting.

In the US, a string of economic indicators, including new home sales for September, durable goods orders, real Q3 GDP growth, and September personal income growth, will be made public this week. The euro zone’s CPI for October is also set to be released.

The remaining 27%, however, believe that LME lead will fall to USD 1,950-1,980/mt and spot lead to RMB 13,550-13,650/mt this week, citing a slowdown in the global economy. On China’s physical lead markets, lead smelters will ramp up sales to increase cash flows in late October, but downstream producers will refrain from buying, which should dent spot prices.

Zinc
SHFE 1412 zinc contract prices opened at RMB 16,660/mt last Friday, then falling from RMB 16,660/mt due to selling pressure, dipping to as low as RMB 16,555/mt and closing at RMB 16,595/mt, down RMB 20/mt or 0.12%. SHFE 1412 zinc contract prices opened at RMB 16,595/mt October 27, moving between RMB 16,580-16,620/mt in the morning, and plunging to RMB 16,500/mt in the afternoon, and closing at RMB 16,555/mt, down RMB 60/mt or 0.36%. Trading volumes decreased 46,028, to 242,234 lots, and total positions were down 11,820 lots to 132,828 lots. SHFE 1412 zinc contract prices are expected to fall further with LME zinc prices.

#0 zinc prices were between RMB 16,860-16,910/mt, with spot premiums of RMB 280-310/mt against SHFE 1412 zinc contract prices. #1 zinc prices were between RMB 16,820-16,840/mt. SHFE 1412 zinc contract prices were down RMB 10/mt from the previous trading day, with spot premiums falling to RMB 280-310/mt. Smelters and cargo holders both increased sales to generate cash. But trading was muted due to weak downstream buying interest from cash flow tightness and market pessimism. Shuangyan branded #0 zinc prices were RMB 16,900-16,910/mt, and prices for Yuguang zinc were RMB 16,880-16,890/mt. Qilin, Jiulong and Qinxin zinc prices were RMB 16,870-16,880/mt, with RMB 16,860-16,880/mt for Mengzi and Baiyin zinc. Belgian #0 zinc prices were RMB 16,840-16,860/mt. SHFE 1412 zinc contract prices fell RMB 50/mt in the afternoon, but spot premiums remained largely unchanged between RMB 280-310/mt, with RMB 260/mt for some brands. Traders see spot premiums dropping on month-end factor and abating market sentiment. Downstream buyers also held cautious.

LME zinc prices dipped to a near-four-month low early last week before rising. With regard to zinc price trends this week, SMM surveyed 30 market players and found that 53% are cautious, believing LME zinc prices will move between USD 2,235-2,275/mt, and SHFE 1412 zinc contract prices will fluctuate between RMB 16,400-16,700/mt. Fed’s October policy meeting and US Q3 growth figures will be the primary focus of markets this week. The Fed is expected to draw QE3 to a close whilst discussing when to raise interest rate due to rising inflation, which will fret investors. When combined with a stronger US dollar index, commodity prices should pull down. US Q3 growth, September durable goods orders and October CPI in the euro zone scheduled for release this week are expected to be mixed, which will drive up commodity price volatility.

34% are bearish, seeing LME zinc prices fall to USD 2,220/mt, and SHFE 1412 zinc contract prices dip to RMB 16,300/mt. smelters sell actively at the month’s end, but traders were unwilling to purchase. When combined sluggish downstream buying interest, spot premiums will fall from RMB 350/mt. Moreover, additional imported zinc will flow to the market this week as the SHFE/LME zinc price ratio rose to 7.5, which will affect domestic markets. Environmental protection inspections ahead of the APEC meeting will also impact zinc demand.

The remaining 13% are bullish, believing LME zinc prices will rebound to USD 2,290/mt, and SHFE 1412 zinc contract prices will test resistance from RMB 16,800/mt. They think major macroeconomic indicators from China and euro zone inverted recently, which helped ease market concerns and will attract bargain hunters into the market. WBMS data show a deficit of 64,700 mt in global zinc market during January and August. Moreover, LME zinc inventories fell over the past month, and stocks in Shanghai, Tianjin and Guangdong also dropped further, with Guangdong’s stocks hitting a record five-year low. These factors will combine to bolster zinc prices.

Tin
In Shanghai spot tin market, downstream wait-and-see sentiment resurfaced on Monday. Most deals closed between RMB 134,500-137,000/mt, with the high-end price down RMB 500/mt from a day earlier. Cheap tin from Bolivia gained favor. Nanshan and Jinlong brand tin traded between RMB 134,500-134,800/mt, while goods from Yunnan traded between RMB 135,000-136,500/mt.

SMM’s recent survey of market players in China’s tin industry reveals the following results:

60% of those surveyed expect tin prices in China to stabilize this week. On the macro front, recent US economic data are positive, versus mixed economic figures from the euro zone and worrisome economic conditions in China. Caution will dominate the market before the US Fed announces its policy decision. In this scenario, LME tin prices are likely to drop, but will find support at USD 19,000/mt. Spot tin prices in China will probably hold stable between RMB 135,000-137,000/mt.

The remaining 40% hold bearish views: (i) on the technical side, LME tin prices may be vulnerable at USD 19,000/mt; (ii) in China’s domestic market, poor downstream demand will drag prices down, but any downside room should be limited since smelters will hold back goods at lows.

Nickel
SMM #1 nickel prices were between RMB 100,800-101,100/mt. Spot price volatility was small in the morning, and quotes were level with 1411 nickel contract prices on the Wuxi electronic trading, with traded prices between RMB 100,800-101,100/mt and trading muted. Spot prices dropped with LME nickel prices after 3:30 pm, with Jinchuan nickel prices as low as RMB 100,500/mt. Jinchuan lowered nickel prices RMB 2,300/mt to RMB 101,000/mt, but trading was quiet.

SMM surveyed 30 market participants and found that none was bullish. 83% believe LME nickel prices will fall to USD 14,000-14,850/mt. LME nickel prices have been falling over the past seven weeks, and LME nickel inventories continue to grow. Demand did not improve, and stainless steel plants continued to lower procurement prices for NPI due to sufficient supply. As of last Friday, domestic NPI prices shed gains from the enforcement of Indonesia’s export ban.

17% believe LME nickel prices will fluctuate between USD 14,700-15,000/mt. LME nickel prices are expected to typically rise, and domestic loss-making NPI producers chose to suspend production, which will give support to NPI prices.