SMM Weekly Review and Forecast (Aug. 30-Sep. 3)

SHANGHAI, Sep. 6 (SMM) -- Global financial markets rallied due to Bernanke’s positive comments on August 27as well as the Federal Reserve’s pledge to adopt measures to stimulate economy. Last week, manufacturing data from the US and China were both upbeat. In this context, Dow Jones broke through 10,000, and base metal prices reversing previous decline and rebounded robustly, setting recent new highs. SMMI advanced by 2.81%, with SMM. Zn and SMM. Cu reacting sensitively, up by 4.05% and up by 3.35% respectively. SMMI.Al and SMM. Sn advanced relative slow, up by 0.79% and up by 0.34% respectively.

Copper

Compared with bullish SHFE copper prices, spot trading sentiment was lackluster. Maintenance at copper smelters has ended and no significant production cuts due to electricity supply restrictions were reported, resulting in a stable refined copper supply.  As the SHFE/LME copper price ratio improved, supply of imported copper also increased, providing ample market supply. Downstream purchasing interest, however, was low over the past week due to doubts over sustainability of recent price gains and since spot discounts did not increase to the same degree as prices rose.  As a result, trading sentiment was lackluster with purchase volumes down sharply.

SMM is optimistic towards copper prices in the coming week.  Although US non-farm  employment data to be released on Friday will likely be disappointing, LME copper prices have already climbed above the key resistance level of USD 7,500/mt, and this will become a new support level if copper prices begin to fall in response to negative US employment data.  After hitting a new high of USD 7,684/mt over the past week, LME copper prices are expected to test USD 7,800/mt if more favorable news is reported. 

Aluminum

SHFE 1012 aluminum became the most actively-traded contract last week. SHFE 1012 aluminum contract prices rose slower than LME aluminum prices, but prices still rose steadily to as high as RMB 15,720/mt.  Chinese government ministries are conducting inspections for energy savings and emission reductions, with the focus on aluminum plants. If electricity supplies for aluminum producers are restricted and aluminum producers are required cut production, aluminum prices may move higher in the short term. Although SHFE aluminum prices undergo corrections, mainstream traded prices will gradually rise.    

Aluminum processors in east China showed little interest in purchases early last week due to tight cash flows at the end of the month. Aluminum prices rose slightly to above RMB 15,200/mt late last week, but downstream processors stayed out of the market as spot discounts widened and SHFE aluminum prices fluctuated. Although steady declines in aluminum stocks improved buying interest in south China, overall trading sentiment last week was lackluster. 

Lead

Domestic lead prices gained at a slow pace after returning above RMB 16,000/mt. On one hand, lower operating rates at downstream producers in Jiangsu and Zhejiang provinces from restrictions on electricity supplies continued, reducing downstream demand. On the other hand, the price at around RMB 16,000/mt is a high price level of the year, and meanwhile LME lead prices lacked upward momentum, both depressing market sentiment, with low market trading sentiment. Traders didn’t keep prices as firm as before in view of increasing inventories from sluggish transactions over the past several weeks. In general, transactions were limited, with prices generally in the RMB 16,000-16,300/mt range.

Zinc

SHFE 1012 zinc contract prices also moved higher last week, with prices breaking through  previous highs and climbing to RMB 17,975/mt. Spot zinc prices mainly moved around RMB 17,100/mt, with prices even surging to RMB 17,400/mt on Thursday. Downstream producers stood on the sidelines, however, leaving trading sentiment lackluster. Total zinc stocks were reported at 488 kt last week, up 2 kt from a week earlier.  Bearish trading sentiment in spot markets resulted in slight increases in zinc stocks, with stocks in north China up 3 kt. Zinc stocks in Shanghai and south China were stable.

Massive mudslides occurred in Gansu province in mid-August, and the repair of transportation networks and recovery of electricity supplies are still in progress. Operations at Gansu Chengzhou Zinc Smelting Factory's mine was halted due to the mudslides, temporarily reducing supply of zinc concentrate. According to company estimates, the mine will not resume full operations until early 2011. Meanwhile, the company also reported large amounts of refined zinc were stockpiled due to disruptions in transportation. Gansu Baohui Industrial Group resumed normal operations in late August after completing the unit maintenance. According to statistics, Gansu province's refined zinc output was 16,542 mt in June, accounting for 3.9% of China's total zinc output. SMM believes any impact on spot zinc markets from the mudslides in Gansu province will be limited in the short term.

Tin

Different from wild fluctuation of LME tin prices, China’s domestic tin prices were relatively stable and met pressure to advance further last week, which is mainly due to a lack of support from consumption. LME tin prices climbed above USD 21,000/mt but domestic tin prices didn’t follow suit. However, downward momentum for domestic tin prices was also weak, and supply of low-priced tin was rarely seen in the market. As of last Thursday, traded prices of major brand tin were between RMB 146,500-148,000/mt and traded prices of unknown brand tin were between RMB 146,000-147,000/mt. Domestic tin market is still at seasonal low-demand period, with sluggish demand reported. Downstream consumers only made purchases on an as-needed basis and adopted a wait-and-see attitude to avoid risks amid wide fluctuation of LME tin prices. Tin market is waiting for the coming of high-demand period.

Nickel

LME nickel prices fluctuated but moved higher last week, reversing declines over the past two weeks and successfully standing above USD 20,000/mt.  On Wednesday, LME nickel prices rallied above USD 21,000/mt, receiving support from strong gains in stock markets, a weaker US dollar, as well from as improved outlook for base metal demand as a result of upbeat manufacturing data from the US and China.  On Thursday, LME nickel prices extended gains to reach USD 21,480/mt.  LME nickel inventories were up by 420 mt, to 120,510 mt, and this growth in inventories may curb upward momentum of LME nickel prices.

In the Shanghai nickel spot market, transactions of domestic nickel became more sluggish as LME nickel prices steadily moved higher.  Purchasing interest from downstream consumers was soft, with transactions mainly between traders. Currently, the domestic/LME nickel price ratio is around 7.74, allowing no profits for nickel importers. In this context, supply of nickel from Russia was lower, and price spread between Russian nickel and Jinchuan nickel narrowed to RMB 500-1,000/mt.  As of last Thursday, mainstream traded prices of nickel from Jinchuan Group were between RMB 168,500-169,000/mt and mainstream traded prices of nickel from Russia were between RMB 167,500-168,000/mt.

According to recent statistics, total stainless steel inventories at 26 warehouses in Wuxi were 210.5kt, down 5.1%, and included 21.2 kt of #200 stainless steel, 162 kt of #300 stainless steel and 27.4 kt of #400 stainless steel.  Overall inventories were still considered high, however, and nickel markets were under heavy inventory pressure. 

Settlement prices from Taigang Stainless Steel were up by RMB 300/mt for #304 stainless steel, but unchanged for #430 stainless steel.  Currently, base prices were RMB 23,220/mt for #304 cold-rolled stainless coil, RMB 22,420/mt for #304 hot-rolled stainless coil, and RMB 11,620/mt for #430 cold-rolled stainless coil.

Stainless steel prices were higher last week, but actual transactions were still not positive. Overall trading volumes declined and players adopted a wait-and-see attitude as sluggish transactions dampened trading sentiment. Although the high-consumption period is approaching, current high inventories will still take time to consume. Short term demand is the key to recent stainless steel price performance, despite that structure adjustment, regional planning and infrastructure planning in 2H 2010 will lend support for stainless steel prices in the mid-term.

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