SMM Morning Comments (Jan 6): Fed’s Hawkish Signals Weighed on Base Metals

SHANGHAI, Jan 6 (SMM) – Shanghai base metals mostly trended lower on Thursday morning after the Fed released hawkish signals. Meanwhile, their counterparts on LME performed similarly.

LME metals mostly dropped in the trading on Wednesday. Copper fell 1.05%, aluminium increased 2.81%, lead dropped 0.85%, and zinc decreased 0.15%.

SHFE metals closed mixed in the overnight trading. Copper fell 0.36%, aluminium rose 1.2%, lead dropped 0.85%, zinc rose 0.1%, and nickel lost 1.13%.

Copper: Three-month LME copper contract opened at $9,737/mt on in the overnight trading yesterday, hitting the highest point at $,9785.5/mt before falling to the lowest point at $9,660.5/mt, and closed at $9,692/mt, down 1.05%. The trading volume was 12,000 lots, and the open interest reached 252,000 lots. Three-month LME copper is expected to trade between $9,600-9,700/mt today,

The most active SHFE 2202 copper contract opened at 70,310 yuan/mt and went down 0.36% to close at 70,000 yuan yuan/mt in the overnight trading. The trading volume was 34,000 lots and open interest stood at 125,000 lots. SHFE copper is expected to trade between 69,500-70,100 yuan/mt today, with spot prices between a discount of 130 yuan/mt and a premium of 220 yuan/mt.

The US ADP non-farm payrolls increased by 807,000 in December 2021, the largest increase in the past seven months, but the Markit service industry and comprehensive PMI in the US both hit a three-month low in December. The minutes of the Fed meeting showed that the interest hike may take place sooner and faster, and some committee members support the tapering shortly after the interest hike. The release of hawkish signals put pressure on the market. The three major U.S. stock indexes fell overnight, and the copper futures were forced down. The consumption in the spot market improved slightly on the second trading day after the New Year’s Day holiday, and the market inventory stood low. The overall supply was tight, so the goods holders held firm to the prices. With the gradual return of market participants and the resumption of long-term orders in the new year, the premiums are expected to rise steadily.

Aluminium: LME aluminium opened at $2,833/mt on Wednesday and closed at $2,912/mt, an increase of $79.5/mt or 2.81%.

Overnight, the most-traded SHFE 2202 aluminium contract opened at 20,465 yuan/mt, with the highest and lowest prices at 20,725 yuan/mt and 20,460 yuan/mt before closing at 20,625 yuan/mt, up 245 yuan/mt or 1.2%.

On the supply side, domestic aluminium production remains at a low level, and the European energy crisis continues to affect smelters. Currently, overseas aluminium smelters have reduced their annual production capacity by more than 800,000 mt, and further cuts are expected. In the short term, domestic aluminium prices are expected to remain high. The short-term focus is still on the potential further aluminium production reduction triggered by the energy shortage in Europe and the domestic aluminium inventory data.

Lead: Three-month LME lead opened at $2,294/mt on Wednesday and fluctuated around the intra-day moving average, then it hit the highest level at $2,319.5/mt in the European session before falling to the lowest point at $2,280.5/mt in the Asian session. It closed 0.48% lower at $2,287/mt. The most-liquid SHFE 2202 lead contract fell 0.85% to end at 15,140 yuan/mt in the overnight trading, after briefly hitting the highest point at 15,340 yuan/mt and dropping to the lowest level at 15,100 yuan/mt.

Zinc: Three-month LME zinc fell 0.15% to end at $3,571/mt last night, with open interest rising 3,857 lots to 254,000 lots. The shortage of energy shortage in Europe and the impact on zinc smelters remain as the market focus. LME zinc is expected to move between $3,520-3,570/mt.

The most-liquid SHFE 2202 zinc contract rose 0.1% to settle at 24,400 yuan/mt overnight, with open interest rising 272 lots to 221,000 lots. On the supply, the natural gas prices in Europe are still rising, overseas electricity prices have risen sharply, pushing higher the production costs of European smelters. Downstream producers cautiously purchased after zinc prices rose, and terminal companies began to take holidays, weakening the demand. The demand in the spot market declined as zinc prices rose. Spot premiums in Shanghai fell while the discounts in Guangdong expanded. The energy shortage in Europe is still the main logic of short-term market transactions. After the SHFE/LME zinc price ratio hit a record low, there will be a certain recovery demand. Zinc prices are expected to fluctuate at a high level in the short term. The most-traded SHFE zinc contract is expected to move between 24,000-24,500 yuan/mt today and #0 domestic Shuangyan zinc may trade at premiums of 160-180 yuan/mt over the SHFE 2202 zinc contract.

Nickel: The SHFE 2202 nickel contract opened at 152,150 yuan/mt in the overnight trading and kept falling. The price fluctuated within a narrow range around 152,000 yuan/mt and fell to the lowest level at 150,700 yuan/mt. It closed at 151,720 yuan/mt, a decrease of 1,740 yuan/mt, or 1.13%, from the settlement price of the previous trading day. The trading volume was 125,000 lots, and open interest decreased by 9,850 lots to 146,000 lots. The nickel inventory stood low, and the shorts increased their positions. The nickel prices are expected to remain volatile in the short term.

Tin: Overnight, the SHFE 2202 tin contract traded sideways. Spot quotations has been raised to above 300,000 yuan/mt, but sales were poor. SHFE tin will continue to move sideways amid stable spot market.