SMM Weekly Review and Forecast (May 10-14)

SHANGHAI, May 17 (SMM) -- China's National Bureau of Statistics announced the economic data for April on May 11th, showing China's overall economy is moving at high levels. China's CPI and PPI for April both set a new high since October 2008, improving market expectations of interest rate hike in China. Meanwhile, China's central bank issued RMB 14 billion 1-year treasury bonds through open market operation on May 11th, an indication that China's quantitative regulations are not slowing and the tightening of monetary policy will continue. SMMI fluctuated higher slightly last week (May 10-14) after significant declines a week earlier, up 0.71%. Both SMMI.Ni and SMMI.Cu experienced relatively high growth rate, up 1.13% and 1.02%, respectively, while other metals showed general performance over the past week, with lukewarm spot transactions reported.

Copper:
On Monday, China announced domestic CPI and other major economic data.  The current high inflationary pressure added to market expectations of higher future interest rates, resulting in sell-offs in domestic financial markets.  SHFE copper market prices plunged along with sharp declines in China's domestic stocks markets. After a round of price declines, the SHFE/LME copper price ratio fell, reducing the supply of imported goods.  However, spot transactions failed to improve despite the falling supply of imports, with spot premiums declining, due mainly to soft downstream purchasing interest.

According to China Customs, China's imports of unwrought copper and copper semis were 436.3 kt in April, down 4.36% MoM, but still up YoY.  SMM believes falling imports of unwrought copper and copper semis were due to rising domestic output and from the unfavorable price ratio for imports during April.  Since the SHFE/LME copper price ratio rose once in May, and since low prices will likely boost purchase interest, SMM predicts China's imports of unwrought copper and copper semis will be higher during May.

Recently, LME copper prices have been closely related to US dollar trends, while SHFE copper prices are strongly linked to Chinese stock markets, indications that larger economic issues are more of a factor on current copper prices.  Although the EU-IMF financial package for Greece initially eased market concerns, the European debt issue will not go away soon.  In this context, the Euro will experience a limited rebound and the US dollar index will continue to fluctuate at high levels in the short term.  However, SMM believes any downward room for LME copper prices to fall will be limited, with strong support available at USD 6,800/mt.  Even if the US dollar index continues to advance, LME copper prices will unlikely drop below this level. 

With regard to market fundamentals, the current cautious attitude of downstream producers has weakened trading sentiment.  Coupled with the arrival of a seasonal low demand period beginning in June, demand is expected to fall further. 

In this context, LME copper prices will fluctuate between USD 7,000-7,200/mt in the short term, and prices are expected to move between USD 6,800-7,500/mt in mid-to-long term.

Aluminum:
SHFE aluminum prices were also weak, with SHFE three-month aluminum contract prices moving narrowly between RMB 15,500-15,800/mt, while the extreme decrease in positions and trading volumes were clear signs of an outflow of speculative funds.  In other news, although delivery dates near, the outflow of goods from futures market entered spot markets, dampening spot prices, and with spot aluminum prices turning again to a slight discount. Meanwhile, overall market sentiment was soft due to sufficient supply.

The debt crisis in the Euro zone remains unresolved, and pessimism with regard to the Euro and British Pound points to a strong US dollar index for the foreseeable future.  Actions by China's Central Government to cool its domestic real estate market, as well as weak domestic automobile production and sales have not affected orders received by aluminum fabricators.  However, market concerns over aluminum consumption have grown in view of the expectation of continued government controls in China's property market.

The condition of strong LME aluminum prices and weak SHFE aluminum prices will remain unchanged in the short term.  Weak domestic aluminum prices are a result of oversupply, and continuous increases in domestic aluminum inventories and depressed domestic stock markets are both negatively affecting SHFE aluminum price trends.  SMM predicts SHFE three-month aluminum contract prices will continue to move between RMB 15,500-15,800/mt in the coming week after transitioning into a new contract month.

Lead:
Earlier the week, trading sentiment around RMB 15,100/mt was brisk, but later the financial aid package in the Europe improved both upstream and downstream producer confidence towards prices stabilizing at RMB 15,000/mt. Coupled with completion of purchasing plan at lead-acid battery producers, downstream buying interest in the latter part of the week waned at prices above RMB 15,250/mt, with transactions returning to lackluster.

It is not expected to see significant rebounds in lead markets, given no growth of demand expected in 2Q.

Zinc:
SHFE zinc price movements were similar to Chinese domestic A-shares market trends last week, and zinc prices moved passively without any clear market direction.  SHFE 1008 zinc contract prices moved mainly between RMB 16,700-17,300/mt over the past week, with a low reported at RMB 16,520/mt.  In addition, activity in the SHFE zinc market was extremely brisk due to the approach of the delivery date for SHFE 1005 zinc contracts, and from weak spot markets.  Trading volumes of SHFE 1008 zinc contracts exceeded 1 million lots on Wednesday (May 12th), setting a new high since February 2010.

Spot market was modest over the past week given a lack of market optimism, and downstream producers mainly purchased on an as-needed basis. A portion of smelters, especially in north China, were reluctant to move goods due to steadily falling zinc prices. #0 zinc prices stood steady above RMB 17,000/mt in Tianjin market most of the time last week, while average traded prices for #0 zinc were RMB 16,448/mt in Shanghai, resulting in price advantage in north China market. However, the proportion of long-term zinc contracts was higher in north China market, and the acceptance of brands by downstream producers was relatively high, so no news that goods are transported from east China and other regions to north China is reported currently, which serves an a major reason behind tight supply and higher prices in north China 
 
Tin:
In the domestic tin spot market, consumers largely adopted a wait-and-see attitude along with the weak LME tin price trend, and it still takes time for inventories held by downstream companies to be consumed. Upstream producers controlled production in a small amount to prevent prices from falling given the tight supply and high prices of tin ore. With limited price advantages, purchasing interest from traders was slightly weak, as they concerned that prices may fall again after stock replenishment under the context that LME tin price trend was not clear and domestic consumption was weak. In this context, supply of goods was not ample in the market, and prices were stable between RMB 143,500-145,000/mt. Transactions were even more sluggish from a week earlier, and most market players' views were not optimistic with regard to price outlook.

Nickel:
LME nickel for delivery in three months time gradually stabilized following a sharp drop which dampened long position sentiment in the market, with nickel prices falling and then fluctuating around USD 22,500/mt. LME nickel prices rebounded slowly flowing the previous week's sell-off pressure, and gradually advanced along with LME copper prices following several day of sluggish transactions. Meanwhile, more stable economic news and data from the EU also help stabilize LME nickel prices, with GDP in the EU having recovered and a cause for optimism, and also curbing downward momentum for LME nickel prices.  LME nickel prices are now expected to move around USD 22,800/mt in the near term. 

In domestic spot markets, spot prices advanced from the past week as LME nickel prices ceased to decline and gradually stabilized. As of last Thursday, prices for nickel from Jinchuan Group were RMB 177,000/mt and prices for imported nickel were at RMB 176,000/mt.  The price spread between domestic and LME nickel prices narrowed, and the supply of imported nickel increased from a week earlier. Overall trading sentiment was moderate, with some downstream consumers entering the market to replenish stocks.

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

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