SMM Weekly Review and Forecast (Oct 12-16)

SHANGHAI, Oct. 20 (SMM) -- During the Chinese National Day holiday, base metal prices represented evident increases from pre-holiday levels along with a falling US dollar index and higher crude oil prices. On October 9th, SMMI advanced 2.86% from the last trading day before the holiday. Of those, SMMI.Ni outperformed others, a gain of 5.9%, and the growth of both SMMI.Cu and SMMI.Zn exceeded 3%. Last week, SMMI fell slightly due to the US dollar trend, with SMMI.Zn showing relatively strong performance, up 0.64%. The LME annual meeting started over the past week, and market players were focused on the recovery of consumption in China and the rest of the world.  

    Copper

    SHFE copper prices followed LME copper price trends. Growing copper imports during September, China's high copper output during August, and only moderate consumption following the holiday all made market players believe supply turn to surplus in the near term.  Spot discounts remained at around RMB 200/mt.

    For price outlook, recent declines in the US dollar index remain a positive factor for crude oil and gold prices, and will push up base metal prices. Economic statistics in China, the US and EU are expected to remain favorable, also helping support copper prices. Second, continuous growth in both LME and SHFE inventories, and weak spot consumption in China is creating market concern that consumption is not recovering as quickly as expected, weighing down copper prices in the short term. In this context, SMM predicts LME copper prices will continue to move in the USD 5,900-6,500/mt range in the coming week. Particular attention should be paid to data for China's copper imports and copper semis output. 

    Aluminum

    SHFE aluminum prices were relatively weak, with resistance still found at RMB 15,000/mt, leaving prices to fluctuate in the RMB 14,700-15,000/mt range, and with no significant improvement seen in total positions. Arrivals of goods in spot markets were normal over the holiday period. Downstream consumption was lower than expected, and low purchasing interest left trading sentiment soft.

    Since mid-September, SMM has had a relatively optimistic attitude towards aluminum price trends. A lack of dramatic market movements during the holiday, constant declines in LME aluminum inventories, and solid support at USD 1,900/mt post-holiday have justified SMM's prediction. Now SMM is pessimistic on the US dollar index trend in October, and believes it will support base metal prices. However, supply surpluses of aluminum ingot in domestic markets will continue to grow. An excess of 17 million mt/yr aluminum capacity will be in operation by the end of 2009, and this level of surplus capacity is significant. 

    In this context, SMM predicts LME aluminum prices will move higher after finding solid support at USD 1,900/mt, but SHFE aluminum prices will remain weak. Whether or not SHFE aluminum prices will climb above the resistance level of RMB 15,000/mt is unclear. 

    Lead

    Domestic lead producers hoped prices would pick up after the holiday, but downstream producers remained cautious interested in purchasing low-priced lead ingot. The impact from recent environment protection inspections continued after the holiday.  Traders reported no sell-offs or other panic behavior. Transactions were made in the RMB 15,550-15,650/mt range in the Shanghai market. The failure of LME lead prices to move upward caused domestic lead prices to hover in their current price range. Trades between smelters and downstream producers were better than deals in trading markets, with ex-works prices RMB 50/mt higher than market prices. Meanwhile, consumption of market inventories was relatively slow.

    Zinc

    On the first trading day after the holiday, SHFE zinc prices opened high at RMB 16,400/mt, and then experienced mild movements. From October 9-16, the average price of #0 zinc was RMB 15,520/mt, and the price spread between spots and SHFE current-month contracts was around RMB 200/mt. 

    Downstream producers showed low buying interest, since LME zinc failed to represent very strong performance over the holiday period, and spot inventories in domestic markets increased nearly by 40 kt, leaving strong supply pressure, and depressing market outlook.  Downstream producers reported low interest in building stocks before the holiday, and post-holiday stock replenishment activity failed to strengthen as expected as well. A wait-and-see attitude dominated the market facing prices above RMB 16,000/mt. 

    Supply of imported zinc increased, with goods mainly from Australia, Korea, Japan and Kazakhstan.

    Tin

    Domestic traders and downstream producers were not enthusiastic in building stocks before the National Day holiday, shadowed by LME tin performance during the holiday period of 2008, and some of them even held no stocks. In this context, spot trading volumes increased on the first three trading days after the holiday, but those purchases were merely made on as-needed basis. Offers for YT and Yun Heng brands remained above RMB 118,000/mt, with small purchases made by some loyal end-users. Market transactions were mainly YT brand, with traded prices ranging from RMB 117,000-117,500/mt. Last week, a limited number of goods under the miscellaneous brand entered the Shanghai market, and low-priced goods among them also generated some market interest due to no great quality difference. 

    Market sources reported a growing number of small mines were closed due to safety concerns, tightening supply of tin ores. Since recent tin ore prices remained high, most smelters scaled back output and conduct the production on the basis of meeting internal demand of tin plating, glass, and end-users in the chemical industry, with cautious attitude towards offers below RMB 117,000/mt. The sluggish electric tin soldering market depressed consumption. Hence, SMM believes tin prices will remain unchanged in the coming week.

    Nickel

    On October 9, Jinchuan Group lifted ex-works prices to RMB 134,000/mt, but domestic market sentiment failed to follow, with sluggish downstream purchasing interest reported, and the price gap between domestic and foreign markets expanded as a result, resulting in arbitrage activity, which became a major contributor to market transactions.

    Supply of goods from Jinchuan Group was ample, with small price spread reported from imported nickel, but its sales were weaker compared with imported goods. As growing price spread between domestic and foreign markets, only imports for financing added to the market supply, and it was common for long-term contracts to be shipped to other places. Spot inventories in Shanghai were huge due to weak transactions and sluggish end-user demand, and consumption of inventories will remain slow in the short term. 

    According to the latest data, stainless steel inventories were 204.8 kt in Wuxi, up 6.7 kt, or 3.38%.  Inventories include 14.1 kt of #200 stainless steel, 149.4 kt of #300 stainless steel, and 41.4 kt of #400 stainless steel. Stainless steel inventories in the Wuxi market exceeded 200 kt for the first time in two years, an indication of strong inventory pressure.    

    Since late September, domestic stainless steel producers have been reporting production cuts or production suspensions, and operating rates at private small-size stainless steel producers have continued to fall since October. Industry insiders say production cuts at mills would likely continue to grow, since downstream demand will remain weak. Combined with an unfavorable export environment, the outlook for domestic stainless steel markets will be pessimistic for 4Q.

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