SMM Morning Comments (Oct 18): Base Metals Closed with Losses on Bearish Macro Sentiment

SHANGHAI, Oct 18 (SMM) – LME and SHFE base metals closed mostly in the negative zone as the macro sentiment was relatively bearish on linger recession fears.

In addition, the US dollar fell sharply by 1.06% overnight, because the new Chancellor of the Exchequer abandoned most of the plans in the government's “mini budget”, and the British pound jumped by 1.64% against the US dollar.

LME copper was flat, aluminium lost 2.03%, lead slid 0.25%, and zinc fell 1.95%.

SHFE copper slid 0.78%, aluminium shed 1.35%, lead inched up 0.2%, and zinc fell 0.73%.

Copper: LME copper opened at $7,566/mt yesterday and edged higher, once hitting the highest and lowest of $7,629/mt and $7,522/mt respectively. At last, it closed at $7,531.5/mt, with no gains or losses. The trading volume was 15,000 lots, and open interest stood at 245,000 lots.

SHFE copper opened at 63,340 yuan/mt in overnight trading and dropped to a low of 62,670 yuan/mt after climbing to 63,380 yuan/mt. At last, the contract closed at 62,710 yuan/mt, down 0.78%. The trading volume was 41,000 lots, and open interest stood at 159,000 lots.

On the macro front, the US dollar fell sharply by 1.06% overnight, because the new Chancellor of the Exchequer abandoned most of the plans in the government's “mini budget”, and the British pound jumped by 1.64% against the US dollar. The weaker-than-expected US retail sales data in September also weighed on the dollar.

On the fundamentals, as of October 17, the copper inventory across China’s major trading markets increased by 16,100 mt from last Friday to 110,300 mt. The total inventory was 1,200 mt higher than in the same period last year when the data was 109,100 mt. Under the large backwardation structure of the SHFE copper spread, smelters were more willing to ship copper cathode to warehouses for delivery, and imported copper arrived at ports one after another over the weekend. In terms of spot, the wide spread between the front-month and next-month contracts changed frequently, which aroused wait-and-see sentiment among traders who will not resume their operation until after the delivery of the SHFE 2210 copper. Therefore, the spot trading was in a stalemate, which may improve when the delivery ends. In the long run, tight supply will still support copper prices, but the specific trend depends on the games between the macro and micro fronts.

Aluminium: Overnight, the most-traded SHFE aluminium contract opened at 18,400 yuan/mt, with its highest and lowest at 18,420 yuan/mt and 18,230 yuan/mt before closing at 18,300 yuan/mt, down 250 yuan/mt or 1.35%.

LME aluminium opened at $2,301/mt on Monday and closed at $2,214/mt, down $46.5/mt or 2.03%.

In terms of supply, with the release of new production capacity and resumption of idled production capacity in Sichuan and Inner Mongolia, the total domestic operating aluminium capacity is slowly recovering. However, with arrival of the dry season in Yunnan, it remains to be seen output cuts in the region will expand. In the short term, the domestic supply pressure is expected to ease. High energy prices at home and abroad will provide cost support to aluminium prices. On the demand side, due to the recent disruption from the pandemic and other factors, operating rates of aluminium processing enterprises in some regions were affected. The domestic aluminium ingot social inventory rose slightly this Monday. LME aluminium inventory continued to grow. While there are many supply-side disturbances at home and abroad, the medium and long-term global demand outlook is pessimistic, thus aluminium prices may remain volatile in the short term.

Lead: LME lead opened at $2,036/mt last night and stabilised at $2,030/mt during the Asian trading hours. During the European trading hours, LME lead fell 0.25% to end at $2,040/mt, after hitting the lowest point at $2,016.5/mt and the highest point at $2,046/mt. The open interest decreased by 473 lots to 93,295 lots from the previous trading day.

The most traded SHFE 2211 lead contract opened at 15,300 yuan/mt and rose 0.2% to end at 15,340 yuan/m, after briefly hitting the lowest point at 15,280 yuan/mt and rising to the highest level at 15,360 yuan/mt. The open interest increased by 158 lots to 59,055 lots from the previous trading day.

Zinc: LME zinc closed at $2,862.5/mt on Monday, down $57/mt or 1.95%. The open interest rose 1,019 lots to 190,000 lots. Overnight LME inventory fell 150 mt to 51,350 mt, down 0.29%. LME zinc was pressured by bearish macro sentiment as well as falling crude prices.

The most traded SHFE 2211 zinc contract closed at 24,480 yuan/mt overnight, down 180 yuan/mt or 0.73%. The open interest lost 1,995 lots to 115,000 lots. With the delivery of SHFE 2210, the SHFE front-month and next-month spread was back to normal. Resurging pandemic across the country also weighed on market sentiment. On the supply side, production growth has not been translated into inventory accumulation. SHFE zinc is likely to fall recently, but the decline will be insignificant.

Overnight, the new UK Chancellor of the Exchequer overturned Truss's economic plan, staging a policy reversal drama; the EU intends to offer 40 billion euros to ease the impact of energy crisis; Russia cut oil export tariffs; the EU intends to set a dynamic ceiling on natural gas prices and limit the single-day increase or decrease; Li Keqiang: the current Chinese economy is stable with momentum, and it is important to enhance the implementation of the policy package to further stabilise the economy; the China National Energy Board clarified the target of the annual comprehensive production capacity of domestic energy in 2025.

Tin: Overnight, the most-traded SHFE tin contract traded rangebound. Domestic tin inventory on warrants rose slightly due to delivery of the front-month contract. LME tin inventory changed little. Overseas premiums remained low. The import profit window remains open. Premiums of imported tin in the domestic market were stable. The impact on supply from the power rationing and pandemic in Yunnan is expected to weaken, while market demand has not improved significantly. As such, SHFE tin will lack upward momentum.

Nickel: On the supply side, the spot pure nickel arrives at the market one after another, easing the shortage of supply in Jinchuan nickel. Sources of Bofeng Nickel were rare due to the delivery of the SHFE 2210 nickel contract. In terms of NPI, according to the inventory data in mid-October, the NPI inventory is destocking, alleviating the spot inventory pressure in China. On the demand side, according to SMM research, the spot prices in Wuxi and Foshan markets continued to rise. Affected by the high futures prices, quotes of #304 cold-rolled and hot-rolled coils increased by different degrees, but the transactions were slightly slack. The demand for pure nickel from the alloy sector still existed. Nickel prices will remain rangebound in the short term because of the coexistence of downstream rigid demand and the pressure from the macro front.

[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.]