SMM Morning Comments (Aug 15): Base Metals Closed Mostly with Losses with US Fed Turning Hawkish Again

SHANGHAI, Aug 15 (SMM) – LME and SHFE base metals closed mostly with losses as the US dollar index recording a losing session last Friday. Though the expectation for the Fed to continue to raise interest rates sharply declined, a number of Fed officials warned the fight against inflation is far from over.

LME copper fell 0.97%, aluminium lost 3.34%, lead slid 1.09%, and zinc shed 1.29%.

SHFE copper fell 0.81%, aluminium lost 2.09%, lead slid 0.88%, and zinc shed 1.35%.

Copper: LME copper opened at $8,145.5/mt last Friday and then fell slightly to $8,070/mt before closing at $8,112/mt, down 0.97%. Trading volume was 14,000 lots, and open interest stood at 246,000 lots.

The most-traded SHFE 2209 copper opened at 62,390 yuan/mt last Friday night, and once fell to 62,030 yuan/mt before closing at 62,210 yuan/mt, down 0.81%. Trading volume was 57,000 lots, and open interest stood at 158,000 lots.

On the macro front, the U.S. July CPI, PPI released last week were both lower than expected and the previous value, and the August one-year inflation rate is also expected to decline. Hence the expectation for the Fed to continue to raise interest rates sharply declined, but then a number of Fed officials warned the fight against inflation is far from over. Last Friday, the dollar index rebounded.

On the fundamentals, the supply in Anhui and Zhejiang provinces are expected to drop amid power rationing, and the production in Jiangxi province has been restricted by the local pandemic. The consumption side is relatively stable, with little impact from power rationing. In the spot market, the spot supply was still tight, and the SHFE 2208 and 2209 spread is still likely to expand on the last trading day before the delivery of SHFE 2208.

Aluminium: At last Friday’s night session, the most-traded SHFE aluminium 2209 contract fell to 18,280 yuan/mt after opening at 18,530 yuan/mt, and closed at 18,280 yuan/mt, down 390 yuan/mt or 2.09%.

LME aluminium opened at $2,522.5/mt last Friday and closed at $2,433/mt, down $84/mt or 3.34%.

The power shortage situation in Sichuan escalated over the weekend. The installed capacity in the province totals 1.07 million mt, while the operating capacity stood at 715,000 mt as of August 12. Smelters in Sichuan are facing risks of shutdowns. The pressure on the domestic aluminium supply side has eased. The domestic downstream aluminium consumption remains poor in the off-season.

Power rationing in some regions has further hurt demand. As such, aluminium ingot social inventories rose further, and spot discounts continued to expand. Massive output cuts in Sichuan may push up aluminium prices significantly. However, due to weak consumption, short-term aluminium prices may fluctuate widely. SMM will keep a close eye on output cuts in Sichuan and downstream consumption.

Lead: LME lead opened at $2,196.5/mt and closed at $2,173/mt last Friday, down 1.09%, after hitting the highest point at $2,217/mt and the lowest point at $2,162.5/mt. The open interest increased by 1,729 lots to 90,348 lots from the previous trading day.

The most traded SHFE 2209 lead contract opened at 15,205 yuan/mt last Friday and fell 0.88% to 15,170 yuan/m, after briefly hitting the lowest point at 15,140 yuan/mt and the highest point at 15,230 yuan/mt. The open interest decreased by 3,848 lots to 56,181 lots from the previous trading day.

Zinc: LME zinc closed at $3,609.5/mt last Friday, down $47/mt or 1.29%. The open interest added 2,295 lots to 204,000 lots. Overnight LME inventory fell 100 mt to 74,500 mt. LME inventory remained low.

The most traded SHFE 2209 zinc contract closed at 24,820 yuan/mt last Friday overnight, down 340 yuan/mt or 1.35%. The open interest fell 4,634 lots to 128,000 lots. On the supply side, the raw material supply shortage eased with the inflow of imported ore, and the zinc supply is expected to pick up. However, as the maintenance of smelters are still not over yet, the expected output is August is 511,000 mt. On the consumption side, the die-casting and zinc oxide sectors have not shown a pivot, while the galvanizing sector showed signs of improving from time to time, with terminal orders remaining unsustainable.

Last Friday, China's new RMB loans and social financing both fell sharply in July compared to the previous month, and were significantly weaker than expected, with social financing growth hitting a six-year low; high broad money supply (M2) growth was accompanied by weak credit and low social financing, still pointing to a lack of effective social demand. US import prices fell in July for the first time in seven months, benefiting from a stronger dollar and lower fuel and non-fuel costs; while one-year consumer inflation expectations fell in August, the latest sign that the price pressures may have peaked.

Tin: At last Friday’s night trading, SHFE tin went down with the exit of longs, and then moved around 200,000 yuan/mt. Domestic tin social inventory continued to fall, with Shanghai recording bigger decline than Guangdong. The increase in LME tin inventory slowed down. Overseas premiums remained low. The import profit window opened slightly. Imported tin for future delivery was quoted at a discount in the spot market. Given stable demand and cautious sentiment, as well as expectations for growing supply, SHFE tin may still hover at lows.    

Nickel: On the macro front, , the US CPI in July disclosed last Wednesday night recorded a growth of 8.5% YoY, lower than the expected 8.7%. The US PPI released the next day increased by 9.8% year-on-year, which was lower than the market expectation of 10.40%. As a result, prices of many commodities in China rose last week. On the supply side, the domestic pure nickel output maintained an upward trend. According to the survey, pure nickel output in China reached 16,000 mt in July, up 2.89% MoM. As for the NPI, Indonesian NPI keeps flowing into China, resulting in an oversupply. On the demand side, despite of the continuous inflow of Indonesian stainless steel, the domestic steel mills increased their production. In terms of alloy, most downstream manufacturers held a wait-and-see attitude amid the unstable pure nickel futures prices. In the medium and long term, the supply of pure nickel is sufficient amid the weak demand, and the production capacity of Indonesian NPI and pyrometallurgy intermediate products continue to be released, suppressing nickel prices. However, the decline in nickel prices may slow down thanks to the favourable macro factors. The market shall keep an eye on the follow-up capacity mismatch of intermediate products and nickel sulphate. At present, it is in the peak season of new energy industry, and the growing demand for nickel sulphate may again push up the nickel briquette demand so that the pure nickel inventory will fall. SHFE nickel is expected to move between 166,000-185,000 yuan/mt this week.

[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.]