SMM Weekly Review and Forecast (Mar 1-5)

SHANGHAI, Mar. 8 (SMM) -- Earlier the week, base metals prices surged following a massive earthquake in Chile, but fell back later as a result of market absorption of the news and a stronger US dollar. During the week of Mar 1st and 5th, base metals prices in China were weaker compared with LME base metals. SMMI edged down 0.53%, with SMMI.Zn leading the price declines, down 2.54%. However, domestic nickel and tin markets tracked upward, with SMMI.Ni and SMMI.Sn up 2.94% and 1.59%, respectively. Market focus has shifted to the two national legislative policy meetings, the NPC and CPPCC, which are now underway in China. The proposal of promoting low-carbon economic development has become the focus, and non-ferrous metals smelting industry and other industries with high-carbon economy will be subjected to be involved. SMM believes a specific series of relevant industrial policies will be announced after the conclusion of the two meetings, which will speed up integration of domestic non-ferrous metals sector.

Copper
Last week, copper prices surged following the earthquake in Chile.  However, short-term speculation over copper prices waned after Chilean copper mines resumed production two days later. After touching USD 7,630/mt, LME copper prices fluctuated in the higher range of USD 7,300-7,500/mt, supported by favorable US economic data and a falling US dollar. SHFE copper prices followed, with spot discounts from earlier in the week expanding due to higher copper prices, but later fell back. 

Improvements in spot consumption failed to materialize in China following the holiday.  .
Surging SHFE copper inventories were also a sign of weak spot consumption. Positive economic data in the US and EU was the driving force leading to higher LME copper prices but weaker SHFE copper prices, and was more an indication of financial market trends than supply and demand. Particular attention should be paid to China’s NPC and CPPCC meetings which are now underway and economic data in the EU and US.

SMM believes LME copper prices will continue to hover around USD 7,500/mt, and that domestic copper prices will feel pressure at RMB 60,000/mt.  Particular attention should be paid to financial news, given the lack of solid market fundamentals.

Following reduction of raw material inventories at downstream producers and improved consumption, spot consumption in the latter part of the Mar 8th-12th week is expected to pick up. According to a SMM survey of cable and wire producers, raw material inventory was 23.7% of the consumption in March, down 8.2% from January levels. Most cable and wire producers said they only made a limited number of purchases after the holiday due to large price gains, preferring instead to consume existing stocks. Raw material for cable and wire producers is mainly copper rod, and so demand for refined copper is expected to begin slowing. 

Aluminum
SHFE aluminum prices were weaker, highlighting the current conditions with strong LME aluminum and weak SHFE aluminum prices. In addition, spot aluminum inventories have grown steadily since the end of the Chinese New Year holiday, while commodity market movements remained sluggish. All three factors prevented SHFE three-month aluminum contract prices from breaking through the 60-day moving average line, with prices mainly fluctuating below RMB 17,000/mt. Meanwhile, the current sluggish aluminum price trend is also keeping downstream producers out of the market. Although spot transactions improved compared with a week earlier, the seasonal peak consumption period is still far off. 

Consumption will recover gradually in March. Although steady growth in domestic aluminum inventories is depressing aluminum prices, a rise in aluminum prices due to stronger demand is still expected, but prices will continue to fluctuate in a narrow band until then. The debt crisis in Greece has eased slightly, and the US dollar is expected to fluctuate next week, leaving open the possibility that LME aluminum prices will rise. In this context, SMM predicts SHFE three-month aluminum contract prices will move around RMB 17,000/mt in the coming week, while spot aluminum prices will also stand firm at RMB 16,000/mt, with signs of rising.

Lead
Improved transactions in domestic lead markets seen earlier in the week did not have sufficient momentum, with prices falling back to between RMB 15,700-15,800/mt. The anticipated strong buying interest in domestic lead markets failed to materialize, as downstream producers took a wait-and-see attitude, resulting in lower operating rates. Coupled with the lack of strong orders, producers opted to consume existing raw material stocks. The number of domestic lead producers, with willingness to move goods at RMB 15,800/mt increased following inventory pressure.

Both buyers and sellers in the domestic lead market generally take a cautious attitude when the NPC and CPPCC are still underway in China, waiting for further direction from macro-policies. 

Zinc
The sluggish spot zinc market depressed SHFE zinc price trends, and SHFE three-month zinc contract prices moved between RMB 18,000-19,000/mt, with weekly closing prices remaining in the RMB 18,060-18,775/mt range. Downstream producers did not purchased large amounts of goods for stocks after the Lantern Festival on February 28th, and although smelters were willing to move goods, most downstream producers were consuming the pre-holiday stocks during the first week after the production restarts, with purchases very limited. As a result, trading sentiment was lackluster in the spot market.

Market purchasing interest was up only when SHFE three-month zinc contract prices hit the pre-holiday low of RMB 18,050/mt and spot zinc prices fell to RMB 17,600/mt on Wednesday, and trading sentient increased in response, indicating market players have accepted zinc prices between RMB 17,500-17,700/mt, and any downward movements for zinc prices to fall will be limited. Average traded price for #0 zinc was RMB 17,850/mt in the Shanghai market last week, down RMB 285/mt compared with a week earlier, or down 1.6%.

Tin
Last week, LME tin prices fluctuated above USD 17,000/mt influenced by a series of news such as earthquake in Chile, debt crisis in Euro zone and exchange rate of US dollar. However, LME tin prices rose sharply and hit a monthly high at USD 17,850/mt after breaking resistance level of USD 17,500/mt on March 4th, and were gradually on downward track after profit taking, receiving support at the 5-day moving average. LME tin inventories were still down to 24,340mt.

Water shortage and restriction of electricity supply caused by severe drought in Yunnan, Sichuan and Guizhou provinces triggered market concern that prices of tin ore will further increase, pushing up LME tin prices. Goods gradually arrived into Shanghai tin market after the Chinese New Year holiday, and purchasing volumes from downstream producers once increased after production resumption. Cargo-holders were reluctant to move goods and lifted offers with expectation of prices increases in the future, with weekly price increases of RMB 2,500/mt and daily price increases of RMB 500/mt. Although LME tin prices continuously set new highs on Thursday and on Friday, transactions were sluggish on domestic tin market. Consumption was curbed, with wait-and-see sentiment dominating the market, but market insiders still believed that tin prices will continue to rise in the future.

Nickel 
Jinchuan Group raised ex-works nickel prices by RMB 5,000/mt on March 3rd, then raised prices again by RMB 3,000/mt on March 4th, for a total increase of RMB 8,000/mt, to RMB 166,000/mt.  Supply in the market was ample, so spot nickel prices did not rise along with LME nickel prices, with traded spot prices RMB 4,000/mt lower than recently raised ex-works prices offered by Jinchuan Group.  Since domestic nickel prices were lower than LME nickel prices, some speculators took advantage of the arbitrage opportunity, and transactions were mainly made between investors or traders.  Downstream consumers made brisk purchases on March 2nd as rumors in the market reported Jinchuan Group would raise ex-works nickel prices again.  However, downstream purchasers became cautious when nickel prices continued to climb.

Supply of refined nickel was ample in the market, but supply of NPI, especially NPI (Ni≥6%), was still relatively tight in domestic markets. It was reported that a rotary kiln nickel production line at Zhejiang Tsingshan Steel Pipe has been put into production, and a new blast furnace at Fujian Wuhang Stainless Steel has also come online.  These new projects will have only a limited impact on NPI supply as they are in the initial production stage.  Meanwhile, NPI producers scrambled to purchase high grade nickel ore at ports, an indication of steady operating rates at China’s NPI producers.  In the short term, tight supply of NPI may still support NPI prices, but the situation will be eased due to the fact that some NPI had already stockpiled goods with reluctance to move goods and NPI producers are now working with high operating rates.

Prices of stainless steel did not keep pace with soaring nickel prices, and even recorded declines.  Higher raw material prices squeezed profits at large stainless steel mills currently running at high operating rates, and stainless steel mills may reduce output if they suffer losses after existing low-priced raw materials are consumed.

In general, market demand was stable, but nickel prices are high even before the arrival of the peak nickel demand period. In the short term, ex-works benchmark prices from Jinchuan Group will still support domestic spot nickel prices in the short term, but domestic nickel prices in spot market were facing increasing pressure to climb. In this context, the situation that domestic nickel prices are lower than LME nickel prices may be hard to reverse.

To contact the writer on this report: Angelawang@smm.cn

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