SMM Weekly Review and Forecast (Jan 4-8)

SHANGHAI, Jan. 11 (SMM) -- Last week, nonferrous metal market experienced a sharp fluctuation within ten minutes on Thursday, which totally depressed the originally bullish sentiment. Earlier last week, prices of nonferrous metals received vital upward momentum due to positive economic signals that orders of US new house increased significantly and US crude oil futures stood firmly at relatively high levels with prices above USD 82/barrel. Prices of domestic nonferrous metals climbed significantly along with prices of overseas market, and SHFE prices of copper, aluminum and  zinc all reached weekly high in the morning session on Thursday. Up to last Thursday, SMMI rose significantly by 2.84%, and SMMI. Pb rose robustly by 5.03% which was totally different from previous static performance. However, after China's central bank meeting set a clear tone of moderating the credit growth, and maintaining a moderately loose monetary policy in 2010, and improving the focus and flexibility of the policy according to new circumstances, prices of nonferrous metals were depressed instantly after profit-taking. Last Friday, SMMI declined slightly by 1.91%, but finally with an average weekly growth by 1.21% when market was closed last week.

Copper

Earlier this past week, LME copper prices strengthened due to the news of labor strikes at Codelco’s Chuquicamata mines, as workers refused to accept the wage offer. The US dollar experienced fluctuations and the US dollar index fell back from 78.0, to around 77.7. Crude oil prices rose due to the weaker dollar, with prices standing firm above USD 80/bbl after gains over the past several days. Following a string of positive news, LME copper prices soared, with prices reaching as high as USD 7,795/mt on Thursday, and beginning 2010 strongly.  Last week, SHFE copper market prices outperformed LME copper. Ample cash flow in early year injected new upward momentum into domestic copper market, and meanwhile SHFE copper prices rallied along with soaring SHFE aluminum and zinc. SHFE 1004 copper contract prices reached as high to RMB 63,450/mt. The rising SHFE copper prices further strengthened market sentiment, causing cargo-holders to hold back goods from the market, tightening market supply, and narrowing spot discounts.

Domestic copper smelters maintained normal production over the past week. Copper mined in provinces hit by heavy snows, including Shandong, Tianjin, Hebei, and Inner Mongolia provinces, is normally sold in neighboring regions, so overall domestic copper supply will not change. Traders of imported goods were reluctant to sell products, and premiums for imported copper moved higher to the USD 80-110/mt, with limited market supply. Market supply of scrap copper increased slightly, propelled by higher profits. According to a recent SMM survey, operating rates at copper plate, sheet, strip and foil producers remain unchanged. Soaring copper prices stimulated end-users to make more orders, increasing copper demand as a result. However, most downstream producers are choosing a wait-and-see attitude in face of the wild fluctuations in copper prices. In this context, overall market trading sentiment was lackluster.

On the first trading week of 2010, copper prices continued the upward trend from late 2009. However, China's Central Bank's move to unexpectedly rise the yield of three-month bills on Thursday triggered market concerns of tighter monetary policy in the country. The news put great pressure on the base metal markets. SHFE copper prices plunged nearly by 4% on the last two trading days of the week, depressing bullish sentiment.

SMM believes long positions will exercise cautious in the coming week, but should not too pessimistic towards outlook, despite of more possible sell-offs. LME lead prices have gained for eight consecutive days, and there is a gap between USD 7,500-7,200/mt. After the round of price corrections, SMM believes LME copper prices will generally move around USD 7,500/mt in the coming week.

Aluminum

Last week, aluminum prices were higher due to the impact of heavy snowfalls throughout north China. Market players were concerned aluminum producers would experience shortages of electric power, caused by the sub-zero temperatures, and this concern caused large amounts of speculative funds to flow to aluminum markets, helping push up SHFE three-month contract aluminum prices to hit a high of RMB 18,685/mt. Last week, the State-Owned Assets Supervision and Administration Commission urged China's state-owned firms to exercise caution when investing in property, stock and futures markets, and China's central bank surprised markets on Thursday by raising the yield of its three-month treasury bills for the first time since mid-August.  These actions depressed market sentiment for higher prices, and SHFE three-month contract aluminum prices fluctuated by nearly 7% within ten minutes, finally ending above RMB 17,500/mt.

Domestic aluminum prices have experienced significant growth recently, creating a strong possibility for price corrections. CBI predicts SHFE three-month contract aluminum prices will move around RMB 17,500/mt in the coming week, due to increasing risks concerning domestic policies and the lingering impact from shortages of electric power. Although spot aluminum inventories have grown steadily, large amounts of speculative funds are expected to continue flowing into base metals markets, as freezing weather in China will remain unchanged in the short term, helping support aluminum prices. In the mean time, rising electric power costs and alumina prices are also pushing up aluminum production costs, limiting any downward movement in aluminum prices. Once the electric power supply tightens and risks concerning domestic policies fade, aluminum prices will likely advance further, with the upward price trends expected to remain unchanged in the medium term.

Zinc

Last week, SHFE zinc prices continued along the upward trend since December 10th, with SHFE three-month contract zinc prices climbing steadily from RMB 21,300, to reach 21,700/mt, hitting the highest level at RMB 22,600/mt, and the optimistic sentiment was strong in the market. However, the reservoir capacity has expanded in some warehouses, resulting in the entrance of large amounts of short positions, and zinc market experienced significant changes as a result. The panic sell-off activities appeared on Thursday and Friday, and SHFE three-month contract zinc prices slumped from RMB 22,600/mt to RMB 20,900/mt, with a cumulative decline from Thursday to Friday reaching 7.5%. Downstream consumers had to stay out of the market due to significant changes in zinc prices.

Spot transactions were brisk on Wednesday and Friday, and average traded prices for #0 zinc were RMB 20,850/mt over the past week, up RMB 900/mt from a week earlier. SHFE zinc prices and other base metals prices experienced marked changed during the first week of 2010, generating market concerns over zinc price trends in 2010 and intensifying mixed views on market outlook.

Lead

Trading sentiment in domestic lead markets eventually picked up thanks to a rising LME lead market and bullish sentiment in other Chinese base metals markets. Domestic lead prices opened the new year at RMB 16,000/mt, quickly climbing to RMB 16,300/mt over the next two days, to as high as RMB 17,000/mt. On Friday, lead smelters were reluctant to move goods due to market optimism, despite of falling LME lead prices. Downstream producers took a cautious attitude towards outlook, with no buying interest reported. Market transactions were largely done by traders for stock replenishment.

Tin

Affected by positive economic data from US and Chinese manufacturing industry as well as the price increases of oil, prices of commodities in London futures market climbed all the way. LME tin prices also followed the rising trend, and momentum of long positions released fully, with prices soaring from USD 16,800/mt to USD 17,850/mt in the first half of last week. LME tin prices experienced corrections in the second half of last week, with prices continuing to fluctuate around USD 17,500/mt.

Inspired by LME tin prices, Yunnan Tin Group firstly raised offers as high as RMB 135,000/mt on Tuesday, leading optimistic view towards price increases among upstream producers. Offers were lifted above RMB 130,000/mt and producers were reluctant to move goods, and they preferred to sell goods to end-users directly. Most traders purchased goods with slight price advantages from cargo-holders who replenished stock when prices were lower earlier, and supply of goods was tight with limited brands available. In this context, traders also moved goods with relatively firm offers, and mainstream traded prices of tin were in the RMB 129,000-132,000/mt range. Products of unknown brands were rarely seen in the market, and products from Yunnan tin group (YT brand) dominated the market. According to downstream tin soldering enterprises, consumption at end-users were still not optimistic, so downstream enterprises had many complaints on jumping tin prices, leading to wait-and-see sentiment prevailing the market.

Next week, SMM believes tin prices will fluctuate narrowly, and possibility may exist that prices will climb slightly.

Nickel

In domestic spot markets, Jinchuan Group raised nickel ex-works prices on January 7th by RMB 2,000/mt, to RMB 143,000/mt. Inquiries increased in the Shanghai market, but spot supply was tight. Meanwhile, some downstream consumers entered the market early in the week, helping improve transactions. In addition, the falling market supply helped narrow the price spread between imported nickel and goods from Jinchuan Group. China's Central Bank announced on Thursday it had reduced money supply by RMB 177 billion over the past week through open market mechanisms, with capital at maturity reaching RMB 40 billion and RMB 137 billion reclaimed from the market, achieving a net reclamation of funds for 13 consecutive weeks. Meanwhile, an official from Management Department of Agricultural Bank of China said the government will likely raise interest rates in 2010, further increasing market concerns that China’s Central Bank will tighten money supply. In this context, SHFE copper prices slumped and other base metals prices fell as well. Market supply of nickel increased, but purchase interest declined, with no deals for imported nickel made at RMB 142,500/mt.

According to the preliminary statistics released by the International Stainless Steel Forum (ISSF) on January 5th, global stainless steel output from 1Q to 3Q 2009 slipped by 15% YoY, but the stainless steel output in 3Q 2009 experienced a YoY growth rate of 12.5%. Excluding China, stainless steel output from 1Q to 3Q 2009 was 5 million mt in all other regions in Asia, down 23% YoY, with declines mainly from India and Japan, and with stainless steel output flat at 2008 levels in Taiwan (China) and South Korea. Stainless steel output from 1Q to 3Q 2009 was 4.6 million mt in Western Europe and Africa, down 31.5% YoY. Stainless steel output was 1.5 million mt in America, down 22.9% YoY, while stainless steel output was only 200 kt in Central and Eastern Europe, down 38.2% YoY.

According to the latest data, stainless steel inventories were 183.7 kt in Wuxi, down 10.1 kt, or 5.21%. Inventories include 12.5 kt of #200 stainless steel, 140.3 kt of #300 stainless steel, and 30.9 kt of #400 stainless steel. Stainless steel inventories were down slightly, but still remain high. Last week, opening prices for #304 stainless steel quoted by steel mills were unchanged from a week earlier, and in line with market expectations. Overall trading volumes were limited, with most buyers staying out of the market and with plans to purchase once the stainless steel market stabilizes. Some stainless steel mills say a limited number of downstream producers with ample cash flow increased purchase volumes, since both nickel and stainless steel prices increased significantly. For those mills, orders were higher, but in general, a wait-and-see sentiment still dominated stainless steel markets.

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