SMM Morning Comments (Jul 14): Base Metals Closed Mixed on Historical High US Inflation Reading

SHANGHAI, Jul 14 (SMM) – SHFE and LME base metals closed mixed overnight. U.S. consumer price index jumped 9.1% year-on-year in June, the largest increase in more than 40 years, indicating that inflation is rapidly moving in the wrong direction, and the market is expecting to 75bps or 100 bps rate hike in July.

LME copper added 1.45%, aluminium edged down 0.04%, lead shed 0.13%, and zinc fell 2.43%.

SHFE copper added 0.43%, aluminium rose 1.22%, lead shed 0.17%, and zinc fell 1.92%.

Copper: LME copper opened at $7,312/mt Wednesday and then fell to $7,160/mt before hitting a high of $7,416/mt. At last, the contract closed at $7,400/mt, up $106/mt, or 1.45%. Trading volume was 23,100 lots, and open interest stood at 237,000 lots.

SHFE 2208 copper contract opened at 55,530 yuan/mt in overnight trading and then moved all the way down to 54,750 yan/mt before closing at 56,370 yuan/mt, up 240 yuan/mt, or 0.43%. Trading volume was 137,000 lots, and open interest stood at 150,000 lots.

On the macro front, U.S. consumer price index jumped 9.1% year-on-year in June, the largest increase in more than 40 years, indicating that inflation is rapidly moving in the wrong direction. The Fed officer Meister said the risk of recession has risen against the backdrop of high U.S. inflation, and the Fed must "stick" to curb inflation. The market expects the Fed to raise interest rates more than its peers, including the European Central Bank, and it is also basically certain that the Fed will raise rates by at least another 75 basis points at the end of July, while increasing the possibility of a 100 basis point hike.

In the spot market, market transactions were quite active in the last two trading day before the delivery of SHFE 2207. And the downstream also stepped into the market when the futures prices dropped to around 56,000 yuan/mt. The traders raised their offers amid tight supply after the import window closed, and the premiums rose greatly for two straight days.

LME copper will trade between $7,320-7,420/mt today; SHFE copper prices are expected to move between 55,000-56,500 yuan/mt. Spot premiums are likely to fluctuate between 140-240 yuan/mt.

Aluminium: The most-traded SHFE 2208 aluminium contract opened at 17,170 yuan/mt overnight, with its high and low at 17,500 yuan/mt and 17,025 yuan/mt before closing at 17,425 yuan/mt, up 210 yuan/mt or 1.22%.

LME aluminium opened at $2,360.5/mt on Wednesday and closed at $2,359/mt, down $1/mt or 0.04%.

At present, the aluminium prices are close to the average full cost of aluminium, smelters, which is 17,500 yuan/mt. However, this has not yet caused aluminium smelters to reduce or stop production. Consumption has shown signs of weakening in the off-season. Downstream enterprises reported insufficient new orders, and exports have also declined. Domestic aluminium inventories may accumulate slightly. In addition, overseas interest rate hikes will also weigh on the overall commodity market. It is expected that the short-term aluminium prices will fluctuate downwards.

Lead: LME lead opened at $1,929/mt overnight and rose to $1,970/mt as US dollar index pulled back after hitting high. LME lead finally closed at $1,931.5/mt, down 0.13%.

The most traded SHFE 2208 lead contract opened at 14,895 yuan/mt overnight and fell to 14,770 yuan/mt. SHFE lead rebounded and amid the cost support and regional supply decline. SHFE lead finally closed at 14,875 yuan/mt, down 0.17%, with the open interest up 900 lots to 49,534 lots.

Zinc: LME zinc closed at $2,934/mt on Wednesday, down $73/mt or 2.43%. The open interest added 1,952 lots to 203,000 lots. LME zinc is expected to move between $2,900-2,950/mt today. Overnight LME inventory fell 475 mt to 82,200 mt, another falling session.

The most traded SHFE 2208 zinc contract closed at 22,240 yuan/mt overnight, down 435 yuan/mt or 1.92%. The open interest rose 69 lots. SHFE zinc is expected to move between 22,000-22,500 yuan/mt, and 0# domestic Shuangyan zinc will be in premiums of 300 yuan/mt over SHFE 2208. On the fundamentals, some smelters reduced the production on falling zinc prices, and the estimated output in July will be 487,300 mt. In addition, SHFE front-month and next-month contracts were in firm backwardation structure amid less sources available in the market. On the consumption side, the operating rates were still ow, but the future consumption can still be expected. Traders had to lower their offers in light of weakening downstream demand, and mostly quoted with premiums of 270 yuan/mt over SHFE 2208.

Overnight, the U.S. June CPI unexpectedly increased by 9.1% year-on-year, a new 40-year high; the index rose 1.3% MoM, the highest since 2005. U.S. President Joe Biden: inflation is "unacceptably high", but the data is "outdated". The market players expect a 100 basis point rate hike in July with a chance of over 70%. When asked about the rate hike in July, the Atlanta Fed President said everything is possible. The State Council: multiple measures will be adopted to expand the consumption, accelerate the release of green and intelligent home appliances consumption potential; China's central bank: 99% of the banking sector assets are in the safe territory, and the current liquidity is reasonably abundant with a slight surplus, indicating strong economic recovery momentum.

Tin: Domestic tin inventory under warrants stabilised, but may increase due to the weakness of the spot market and upcoming delivery of SHFE 2207 tin contract. LME tin inventories did not change much. The import profit window was still closed. A small amount of imported tin was quoted at small discounts. The most-traded SHFE tin contract rallied after opening lower overnight and then moved sideways. Both longs and shorts remained cautious. Given the balanced supply-demand dynamics, SHFE tin is likely to continue to move within a narrow range before the completion of the futures delivery and the resumption of production of tin smelters.

Nickel: On the supply side, domestic nickel plate output rose amid improving terminal demand, and the import window has also opened recently. For NPI, falling NPI prices earlier have put NPI plants on the edge of losses, and NPI plants reduced or suspended the production to varying degrees to tackle the situation. On the demand side, military and aerospace sectors have robust demand for alloy, subsequently raising the demand for Jinchuan nickel plate. In terms of stainless steel, the terminal demand has been affected by resurging pandemic in Wuxi and Foshan, where the demand could not easily rebound. It is expected that nickel prices will not rise substantially amid rising primary nickel supply and modestly improving demand.

[Disclaimer: The above representation and data is based on market information SMM believes to be reliable at the time of acquiring as well as the comprehensive assessment by SMM research team, and any and all information provided in this article is for reference only. This article does not constitute a direct recommendation for investment or any decisions in any form and clients shall act on their own discreet and any decisions made by clients are not within the responsibility of SMM.]