SMM Morning Comments (Jan 4): Base Metals Closed Mostly with Losses on Rising US Dollar

SHANGHAI, Jan 4 (SMM) – LME and SHFE base metals closed mostly with losses on rising US dollar on Tuesday. Specifically, the dollar jumped on Tuesday, while the euro fell on moderating inflation. The Fed slowed the pace of rate hikes to 50 basis points in December after four consecutive 75-basis-point hikes, but highlighted the need to keep rates in restrictive territory to keep inflation down.

LME copper fell 0.64%, aluminium lost 0.3%, lead dropped 0.28%, and zinc gained 0.74%.

SHFE copper fell 1.01%, aluminium lost 1.15%, lead dropped 0.13%, and zinc slid 0.17%.

Copper: LME copper opened at $8,431.5/mt on Tuesday, touching the high and the low at $8,459/mt and $8,300/mt respectively. At last, the contract closed at $8,320/mt, down 0.64%. The trading volume was 11,000 lots, and open interest stood at 237,000 lots.

SHFE 2302 copper opened at 65,580 yuan/mt overnight. It hit the high of 65,780 yuan/mt before closing at 65,010 yuan/mt, down 1.01%. The trading volume was 22,000 lots, and open interest stood at 96,000 lots.

On the macro front, the dollar jumped on Tuesday, the euro fell on moderating inflation and the Federal Reserve will release minutes from its December meeting on Thursday. The Fed slowed the pace of rate hikes to 50 basis points in December after four consecutive 75-basis-point hikes, but highlighted the need to keep rates in restrictive territory to keep inflation down.

On the fundamentals, SMM copper social inventory across major markets in China added 11,300 mt from last Friday to 109,300 mt as of Tuesday January 3, alluding accumulating inventory during the New Year’s Day holiday. The pandemic situation in China is still affecting the processing industry, as most fabricators reported low operating rates with its employees still infected with covid. In addition, more and more terminal players will be closed for Chinese New Year holiday in January, another important cause for accumulating social inventory. On the whole, SHFE copper will fall to some extent amid weak supply and demand.

Aluminium: The most-traded SHFE 2302 aluminium contract opened at 18,170 yuan/mt overnight, with its high and low at 18,175 yuan/mt and 18,040 yuan/mt before closing at 18,060 yuan/mt, down 210 yuan/mt or 1.15%.

LME aluminium opened at $2,318/mt on Tuesday, with its high and low at $2,318.5/mt and $2,309/mt respectively before closing at $2,311/mt, a drop of $7/mt or 0.3%.

The power rationing in south-west China dragged down the domestic operating aluminium capacity. Once downstream enterprises resume their production, regional supply shortages will occur in the first quarter. However, the short-term aluminium prices will face downward pressure to falling domestic and overseas demand, inventory accumulation, as well as weaker cost support. Downstream operating rates fell in the off-season, and spot market was muted.

Lead: Overnight, LME lead opened at $2,295/mt and fell to around $2,250/mt at the beginning of the session, then rebounded to around $2,290/mt during the European trading hours. However, due to the strengthening of the US dollar index, LME lead prices fell under pressure to around $2,250/mt. As the bears paid off, LME lead fluctuated upside and finally closed at $2,285.5/mt, a decrease of 0.28%.

The most-traded SHFE 2302 lead contract opened at 15,885 yuan/mt. Amid the delivery of SHFE 2301 lead contract and the expectations of downstream pre-holiday restocking, SHFE lead prices stood at 15,875-15,900 yuan/mt. In the second half of the session, SHFE lead prices once moved above the 15,900 yuan/mt, but finally closed at 15,880 yuan/mt, a decrease of 0.13% due to the accumulated inventory. The open interest increased 172 lots from the previous trading day to 68,002 lots.

Zinc: LME zinc closed at $2,989.5/mt on Tuesday, up $22/mt or 0.74%. The open interest added 215 lots to 187,000 lots. LME inventory fell 1,550 mt to 30,475 mt.

The most traded SHFE 2302 zinc contract closed at 23,380 yuan/mt overnight, down 40 yuan/mt or 0.17%. The open interest added 1,174 lots to 87,231 lots. While US dollar remained strong and the manufacturing PMI recorded a new low throughout 2022, the south region of China ushered in the peak of covid infection, leading to insufficient labour forces. Coupled with the approaching Chinese New Year, more downstream players were closed for holiday. SMM zinc ingot social inventory across seven markets in China rose during New Year’s Day holiday, offering less support to SHFE zinc.

On the macro front, the final US Markit manufacturing PMI for December recorded 46.2, a new low since May 2020. ECB Governing Council member Kazaks said he expects the interest rates to be raised sharply at the following two meetings, with future rate hikes likely to be smaller. Ukrainian President Zelensky spoke to Dutch Prime Minister Rutte on January 3. Dutch Prime Minister Rutte said that the Netherlands will continue to help and support Ukraine. Since February 24 last year, the Netherlands has provided 987 million euros in military aid to Ukraine. Alan Greenspan said that as the Federal Reserve tightens monetary policy to curb inflation, and a recession in the United States is "the most likely outcome"; but the Fed will not cut interest rates as a resul. Liu Kun, Minister of Finance of China, said that the expansion of fiscal policy should be moderately increased and that the scope of special bond funds to be invested and used as capital funds will be expanded in an appropriate amount this year.

Tin: Overnight, SHFE tin rose initially and then fell back, closing at around 209,500 yuan/mt. A small amount of capital flowed out of the market. The domestic tin inventory under SHFE warrants continued to increase. Premiums in the spot market narrowed further. LME tin inventories changed little. Overseas premiums turned into small discounts. The import profits expanded. Since there is little disturbance to the supply-demand dynamics, SHFE tin may hover sideways at highs.

Nickel: On the supply side, pure nickel imports kept suffering losses, hence premiums of NORNCIKEL nickel could hardly fall. The premiums of Jinchuan nickel, on the other hand, are expected to fall on high nickel prices, which may be even lower than that of NORNICKEL nickel. For NPI, except for some traders who restocked out of optimism over the post-holiday market, spot supply is the market was low. NPI plants were firm to their prices amid surging nickel prices and rebounding stainless steel prices. On the supply side, market inquiries picked up on improving market sentiment, and the transactions were mostly for cargoes to be delivered in February. In the alloy market, some players restocked for the Chinese New Year holiday. On the whole, tight pure nickel supply and slightly improving demand will keep SHFE nickel rangebound in the near term.

[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.]