SMM Morning Comments (Feb 1): Base Metals Closed Mostly Mixed on Signs of Easing Inflation

SHANGHAI, Feb 1 (SMM) – SHFE and LME base metals closed mostly with gains overnight. On the macro front, US labour costs rose less than expected in the fourth quarter, reflecting a slower growth in inflation. The Federal Reserve is expected to announce a 25 basis point interest rate hike on Thursday.

Copper: LME copper prices closed at $9,223.5/mt overnight, a rise of 0.9%. Trading volume was 18,000 lots and open interest stood at 255,000 lots.

The most active SHFE 2303 copper contract ended at 69,720 yuan/mt overnight, up 0.39%. Trading volume was 35,000 lots, and open interest stood at 176,000 lots.

On the macro front, US labour costs rose less than expected in the fourth quarter, reflecting a slower growth in inflation. The Federal Reserve is expected to announce a 25 basis point interest rate hike on Thursday, which bolstered copper prices.

In terms of fundamentals, the inventory of copper cathode has continued to increase following Chinese New Year holidays amid sluggish downstream buying interest. Most downstream demand still needs time to recover, and copper prices are still fluctuating at high levels. The current consumption is still weak, and the overall market is unlikely to improve until after February 5. Copper prices are expected to remain rangebound until consumer demand fully recovers.

Aluminium: The most-traded SHFE 2303 aluminium contract opened at 18,980 yuan/mt overnight before closing at 19,130 yuan/mt, up 205 yuan/mt or 1.08%.

LME aluminium opened at $2,572/mt on Tuesday and closed at $2,648/mt, an increase of $82/mt or 3.2%.

There are rumours of aluminium production cuts in Yunnan, triggering bullish sentiment in the aluminium market. This, coupled with expectations for consumption recovery, will keep aluminium prices firm.

Lead: Yesterday, the LME cash-to-three-month lead contract rose to $2,172/mt, then declined 0.12% to close at $2,137/mt.

SHFE 2303 lead contract hovered sideways within a narrow range after falling rapidly, but then fell rapidly again and closed at 15,125 yuan/mt, down 0.69%.

Zinc: According to Fed’s officials, if the inflation continues to cool for another three months, they will be confident enough to halt rate hikes in the rate meeting during May 2-3, citing the inflation data for January, February and March. Fed officials once said that they would pay close attention to the lobar cost index (ECI), a gauge to measure wage growth. Although the quarterly rate of ECI released last night is unlikely to change the Fed's decision to raise interest rates this week, it may have a profound impact on future rate hikes. International Monetary Fund (IMF) forecasts that the economic growth of China, the US and the eurozone will be 5.2%, 1.4% and 0.7% respectively in 2023. In China, the profits of industrial enterprises above designated size dropped by 4.0% in 2022, but their operating income rose by 5.9% year-on-year. The profits of steel, petroleum processing and vaccine manufacturing industries declined sharply, while consumption, mining, and hydropower industry performed well in profitability.

Overnight, LME zinc opened at $3,434/mt before moving down to consolidate at $2,975/mt. It eventually closed down $37.5/mt or 1.09% at $3,402/mt. The trading volume rose to 7,658 lots, and open interest gained by 1,838 lots to 211,000 lots. LME zinc inventory shed by 250 mt to 17,425 mt.

The most-traded SHFE 2303 zinc contract opened lower at 24,195 yuan/mt and fluctuated upwards before closing at 24,380 yuan/mt, down 20 yuan/mt or 0.08%. Trading volume was down to 44,037 lots, and open interest fell 1,737 lots to 96,509 lots. The downstream producers mainly focused on digesting inventory at the beginning of production resumption, and the overall trades were muted amid high zinc prices. The strong market expectations for post-holiday consumption growth have bolstered zinc prices to stabilise at high levels, but the consumption recovery in reality still remains to be seen. It is expected that zinc prices will primarily move sideways.

Tin: SHFE tin hovered sideways at a high level last night with few funds of the most-traded SHFE tin contract leaving the market.

Fundamentally, the domestic warrant inventory changed little and the spot market has not yet fully recovered due to the weak demand. The average premiums remained stable. LME inventory did not change much as the expected import profits were limited.

In terms of futures prices, the SHFE tin prices hovered at a high point at 236,000 yuan/mt. As the warrants of the most-traded contract declined, investors continued to roll their positions onto distant-month contract.

To sum up, the short-term bullish factors were gradually paid off, and the tin prices gradually stabilised after the Chinese New Year holiday. In the near future, attention should be paid to the inventory changes after the recovery of demand.

Nickel: On the supply side, the absolute spot price of pure nickel remained high though the spot premiums fell yesterday when SHFE nickel opened high. For NPI, the market was well supplied as NPI plants maintained production during Chinese New Year holiday, while the plants were firm to prices amid optimistic market outlook. On the demand side, the market transactions of stainless steel fell slightly from a day ago. Though ferromolybdenum prices surged, the demand for 316L was weak, hence the spot offers were conservative. In the alloy market, high nickel price suppressed the demand for pure nickel despite post-holiday restocking demand. To sum up, as spot trades were contained by high nickel price, the fundamentals will be less strong to underpin nickel price in the near future.

[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.]