SMM Morning Comments (Oct 28): Base Metals Closed Mostly with Losses on ECB Rate Hikes

SHANGHAI, Oct 28 (SMM) – LME and SHFE base metals closed mostly with losses on ECB rate hikes by another 75 basis points to 1.5%, the highest since 2009. On the other hand, the US third-quarter GDP released on Thursday was better than expected, ending a two-quarter decline in output. As a result, the US dollar index closed up 0.8% overnight.

LME copper fell 0.32%, aluminium lost 1.67%, lead slid 1.64%, and zinc dropped 0.74%.

SHFE copper rose 0.63%, aluminium lost 0.4%, lead slid 0.49%, and zinc edged down 0.04%.

Copper: LME copper opened at $7,692/mt on Thursday and fluctuated upward. It fell slightly after hitting $7,800/mt. At last, the contract closed at $7,755/mt, down 0.32%. The trading volume was 21,000 lots, and open interest stood at 237,000 lots.

SHFE 2212 copper opened at 63,630 yuan/mt overnight and once hit the highest of 64,160 yuan/mt. At last, the contract closed at 63,870 yuan/mt, up 0.63%. The trading volume was 54,000 lots, and open interest stood at 195,000 lots.

On the macro front, the US third-quarter GDP released on Thursday was better than expected, ending a two-quarter decline in output. As a result, the US dollar index closed up 0.8% overnight. Crude oil futures rose for the third day in a row on Thursday, with Brent Crude and US oil closing up by 1% and 0.78% respectively, which was bullish for copper prices.

On the fundamentals, with the gradual consumption of delivered warrants and imported copper, and the subsequent delay in the arrival of imported copper at ports, the spots available in the market during the week were scarce. In addition, due to the six consecutive declines in inventory in south China, some goods from Shanghai have recently flowed into south China, hence the inventory grew slightly. On the demand side, since copper prices were still at a high level and end-consumer demand was insufficient, downstream processing companies only purchased on rigid demand, and spot transactions were average. The market highly expects the US Fed to slow down the rate hike and is optimistic about the continuous recovery of the domestic economy. Therefore, copper prices will remain rangebound with some upward potential.

Aluminium: Overnight, the most-traded SHFE 2211 aluminium contract opened at 18,380 yuan/mt and rose 18,465 yuan/mt before closing at 18,345 yuan/mt, down 73 yuan/mt or 0.4%.

LME aluminium opened at $2,333.5/mt on Thursday, with its high and low at $2,341.5/mt and $2,275/mt respectively before closing at $2,291/mt, a drop of $39/mt or 1.67%.

Recently, the central banks of many countries have actively intervened in exchange rates to prevent excessive depreciation of their currencies. The US dollar index continued to fall. The market was still pricing in slower rate hike by the US Federal Reserve. Fears of sanctions against Rusal resulted in large fluctuations in LME aluminium. The domestic fundamentals are relatively weak. Although the inventory of aluminium ingots remains low, the destocking was driven by decrease in arrivals rather than improvement of consumption. Aluminium prices will be mainly influenced the Fed's interest rate hike decision, the domestic economic stimulus policy, and the LME's final decision on sanctions against Rusal. Aluminium prices will remain volatile in the short term.

Lead: LME lead opened at $1,889.5/mt and ended 1.64% or $31/mt lower at $1,860.5/mt last night, after hitting the highest point at $1,914.5/mt and the lowest point at $1,852.5/mt.

The most-traded SHFE 2212 lead contract opened at 15,075 yuan/mt and fell by 0.49% to 15,090 yuan/mt, after briefly hitting the lowest point at 15,055 yuan/mt and the highest point at 15,140 yuan/mt.

Zinc: LME zinc closed at $2,944/mt on Thursday, down $0.74/mt or 0.75%. The open interest fell 511 lots to 190,000 lots. Overnight LME inventory fell 750 mt to 48,175 mt, remaining low. Warrants’ premiums stabilised at the high of $155/mt in eurozone, and low inventory also offered some support.

The most traded SHFE 2212 zinc contract closed at 24,150 yuan/mt overnight, down 10 yuan/mt or 0.04%. The open interest added 3,300 lots to 114,000 lots. On the fundamentals, the TCs of zinc concentrate extended the gains on sufficient supply, and higher profits encouraged the smelters to ramp up the production. On the consumption side, the downstream players were less interest in purchasing raw materials in light of high zinc prices. The spot market was relatively quiet recently. To sum up, zinc prices lacked support on rising supply and sluggish demand, while the inventory level is worth attention at present.

Overnight, the European Central Bank raised interest rates again and put the reduction of its huge balance sheet on the agenda, but said it had made "substantial" progress to combat historically high inflation. The ECB raised its deposit rate by another 75 basis points to 1.5%, the highest since 2009. The US economy rebounded strongly in the third quarter amid shrinking trade deficit, but the data exaggerated the health of the US economy as domestic demand was the weakest in two years due to aggressive interest rate hikes by the Federal Reserve. Chinese Premier Li Keqiang presided over an executive meeting of the State Council, which proposed that policies to expand investment and promote the consumption should be pushed to accelerate the effect of fiscal and financial policy tools to support major projects in the fourth quarter.

Tin: Overnight, SHFE tin fell rapidly due to entry of shorts. The domestic tin inventory under SHFE warrants rose slightly. Trades in the spot market were still muted. LME tin inventory continued to decrease. Overseas premiums remained low. The import profit window remains open and the import profits are expected to be considerable. There are quotations for imported tin that will arrive at ports at the end of November. Due to stable demand and gradual increase in supply, SHFE tin may continue to fluctuate at a low level and come under pressure.

Nickel: On the supply side, the reduction of the ex-factory prices in Jinchuan nickel strengthened the liquidity of the spot pure nickel, and traders became more willing to purchase even though the end of October is approaching. In terms of NPI, the shipments of various factories are good, and the finished product inventory is falling gradually, easing the previous inventory pressure. Besides, the NPI plants held firm prices amid the rising ore prices. On the demand side, the spot prices of stainless steel in the Wuxi and Foshan markets decreased slightly. According to SMM research, the traders were bearish for spot trading. In terms of alloys, the high nickel prices suppressed the terminal companies’ buying interest, and orders of civil alloy producers were lower than expected, resulting in a decline in pure nickel demand. In general, the downstream demand slightly weakened, which may not prop up nickel prices strongly.

[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.]