SMM Weekly Review and Forecast (May 24-28)

SHANGHAI, May 31 (SMM) -- On Monday, China's stocks and base metals markets experienced larger gains following a media report that the National Development and Reform Commission (NDRC) said China would not impose property tax within three years. SMMI was up 1.03% on a weekly basis, with nickel prices leading gains. SMMI.Ni advanced 2.75%, followed by zinc, which rose 1.28%. Over the past week, base metals prices generally rebounded, but any upward momentum was weak due to uncertainties towards outlook. At the closing of China-US strategic and economic on May 25th, China and US both promised to further enhance economic cooperation between the two countries, and promote a strong, balanced, and persistent growth of global economy. The promise will favor the development of economic and trade between the two countries in the long term. Market focus on the euro zone is now shifting from Greece's debt issues to Spain's banking sector. SMM expects volatile performance for base metals market in the short term, which will weigh down technical rebounds on base metals market.

Copper
Last week, SHFE copper prices were supported by strong performance in China's stocks markets, helping the SHFE/LME copper price ratio improve further.

With an improved price ratio, premiums for imported copper increased to around USD 90/mt.  Imported hydro-copper was traded between USD 70-80/mt, and high-quality imported copper was heard at USD 110-120/mt. There was only low buying interest at premiums above 100, limiting any further increase in premiums.  

In the spot market, imported goods dominated market supply, but supply of high-quality imported goods was limited. Cargo-holders of domestic goods remain unwilling to move goods, with sparse offers for standard-quality goods. Following higher prices on the SHFE copper market, spot premiums fell from previous high levels, with levels at one time heard at discounts of negative RMB 100/mt-RMB 0/mt on Thursday when SHFE copper prices soared to a high level of the week.

Downstream demand exhibited no significant changes, with negative impact from a traditional low demand period expected to emerge in late June. Downstream producers were sensitive to prices when making purchases, with buying interest waning significantly when spot prices were above RMB 55,000/mt, and purchasing interest was relatively brisk at low levels. In general, trading sentiment was little changed from a week earlier, but trading volumes were expected to drop on a weekly basis due to restrictions of invoice service by the end of the month.

Copper price trends over the past week were generally in line with SMM predictions, with upward room still available after stabilizing at the 5 and 10-day moving average. 

Meanwhile, copper prices are closely linked to other external financial and metal markets.  The Euro trend remains a concern, and the US dollar index is expected to fluctuate between 86 and 88. Strong performance in equities markets is also another driving force for copper prices, but tensions between North and South Korea may undermine recent strong gains in stocks. Any solid negative news will likely weigh down copper prices.

In summary, SMM believes LME copper prices will move between USD 6,800-7,050/mt in the coming week. 

Aluminum
SHFE three-month aluminum contract prices gradually stabilized above the 5-day moving average during the past week (May 24-28) after remaining steady at RMB 15,000/mt a week earlier. However, heavy pressure was still reported above the 10-day moving average, with sluggish trading volumes and positions also serving the main reasons behind weak aluminum prices. Transactions early last week were slightly better than those the previous week, as downstream producers expressed strong purchase interest at higher price levels. Meanwhile, traders kept offers firm, allowing spot discounts to remain around RMB 50/mt in east China, and overall market sentiment was lackluster.

The debt crisis in the Euro zone will remain unresolved in the short term, and tension on the Korean peninsula is building as well. Improving economic data from the US helped raise risk aversion, allowing the US dollar to remain strong in the short term. LME aluminum inventories shrank, following a period of strong growth, and any LME stocks tied up in financial deals will not be able to be released before what many believe will be a period of higher financial costs and rising interest rates. In this context, LME aluminum prices will remain weak, but will receive strong support at USD 2,000/mt, as well as strong resistance above this level. Domestic aluminum ingot inventories fell over the past week, but no substantial consumption will mean aluminum inventories will actually continue to grow. SMM predicts SHFE three-month aluminum contract prices will move between RMB 15,100-15,500/mt in the coming week.

Lead
Limited trades in domestic lead markets were done in the RMB 14,500-14,800/mt range, with deals gravitating towards the low-end. Although domestic lead prices were still below RMB 15,000/mt, and with smaller price fluctuations from a week earlier, downstream producers were not eager to purchase due to pessimistic market outlook.

Currently, some pessimistic lead-acid battery producers believed prices would fall as low as RMB 13,000/mt. However, many downstream producers hoped lead prices would stop falling further, as battery prices are subjected to declines if lead prices weaken more. 

Zinc
SHFE zinc prices were very sensitive to movements in China's A-share stock markets over the past week (May 24-28). SHFE 1009 zinc contract became the dominant price, with short positions growing significantly. Short-covering helped push up zinc prices on the last two trading days of last week. SHFE 1009 zinc contract prices hovered mainly between RMB 15,500-16,100/mt, with prices moving between the 5-day and 10-day moving averages.

The low-end of SHFE zinc prices climbed over the past week, but the weak market sentiment caused spot zinc prices to advance at a slower pace compared with SHFE zinc prices. Downstream buyers were pessimistic toward market outlook when zinc prices were higher than RMB 15,500/mt, which exerted strong resistance on zinc prices. Average traded prices for #0 zinc were RMB 15,510/mt last week in Shanghai market, up RMB 240/mt from a week earlier, which was the first time spot zinc prices stabilized over one month. SMM predicts SHFE zinc prices will test the RMB 16,000/mt mark, and spot zinc prices will stand steady at RMB 15,000/mt, heading for RMB 15,500/mt.

Tin
In the spot market, prices firstly suppressed but later rebounded last week. Traded prices of major brand tin were between RMB 142,000-143,000/mt, and prices of unknown brand tin were between RMB 141,000-141,600/mt. Spot prices continued to fall slightly due to lack of deals earlier the week. However, transactions were still sluggish despite that producers had lowered ex-works prices. Later, some domestic smelters raised ex-works prices as LME tin prices advanced, helping support spot prices. Prices of major brand tin were up to RMB 142,500/mt, but transactions were still depressed. Currently, downstream producers continued to adopt a wait-and-see attitude and planned to make purchases when prices fall further in the future. Cargo-holders' confidence in holding goods dampened due to sluggish transactions and made little stocks replenishment. In this context, supply of major brand tin and unknown brand tin was both very limited last week. 
 
Presently, LME tin prices have difficulties in making any breakthrough, failing to provide a clear market direction for domestic tin prices. In addition, most downstream producers, with stocks in hand, are not eager to make purchases. Therefore, SMM takes a pessimistic view towards domestic tin prices in the coming week.

Nickel
Jinchuan Group decided on May 25th to shut flash furnaces for cooling maintenance, and this maintenance cycle is scheduled to last for 140 days. Jinchuan Group also raised ex-works prices by RMB 2,000/mt, to RMB 168,000/mt, on the same day. As the news spread, traders became cautious to move goods as they now believed domestic nickel prices would rise and replenishment of stocks at lower prices would be difficult once LME nickel prices advanced. Traders kept offers firm in the morning session and were reluctant to move goods at low prices. In addition, traders said supply of nickel from Russia has been relatively limited. Transactions of nickel from Russia increased slightly as the domestic/LME nickel price ratio improved slightly.

The unwillingness of domestic traders to move goods was strong, and domestic spot prices were boosted as a result. As prices fluctuated slightly, transactions remained modest, and mostly among traders.

Settlement prices from Taigang Stainless Steel were adjusted recently. Prices for #304 cold-rolled and hot-rolled stainless steel were lowered by RMB 3,100/mt, and prices for #430 cold-rolled stainless steel were also down by RMB 1,400/mt. After the adjustment, prices are RMB 22,000/mt for #304 cold-rolled stainless steel and RMB 20,500/mt for #304 hot-rolled stainless steel, while prices are RMB 12,000/mt for #430 cold-rolled stainless steel.

Market prices have fallen significantly recently, and some private steel mills told SMM that recent orders are down sharply, and believed to be caused by falling orders from traders, and is a sign market confidence is down and players are adopting a wait-and-see attitude. The amount of goods shipped from steel mills during May was also disappointing. Steel mills offers were unchanged during the week of May 17-21st, and with prices RMB 4,000-4,500/mt higher than market prices. Mills were forced to lower settlement prices during the week of May 24-28th in order to reduce client losses, but the market response was still weak. Currently, some #200 steel mills are beginning to cut or halt production, while #300 steel mills are also planning maintenance, both signs of pessimism in the short term.

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

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