SMM Morning Comments (Mar 6): Base Metals Closed Mixed on Strong Economic Data and Potentially Sustained Rate Hikes

SHANGHAI, Mar 6 (SMM) – LME and SHFE base metals closed mixed last Friday night. On the macro front, although the Federal Reserve said that strong economic data may keep interest rates elevated, Atlanta Fed President Raphael W. Bostic said he prefers to raise interest rates in a slow and steady manner.

Copper: LME copper closed at $8,923.5/mt last Friday evening, a decline of 0.03%. Trading volume was 11,000 lots and open interest stood at 251,000 lots. The most active SHFE 2304 copper contract finished at 69,670 yuan/mt last Friday evening, up 0.4%. Trading volume was 20,000 lots and open interest stood at 150,000 lots.

On the macro front, although the Federal Reserve said that strong economic data may keep interest rates elevated, Atlanta Fed President Raphael W. Bostic said he prefers to raise interest rates in a slow and steady manner. In addition, the yen, which is particularly sensitive to long-term US-Japan interest rate differentials, rose last Friday, while the US dollar index fell. On the fundamentals, as of Friday March 3, SMM copper inventories in major Chinese markets decreased 16,300 mt to 309,100 mt from last Monday, up 112,500 mt from pre-CNY holidays. Due to the increase in exports of domestic copper recently, arrivals in domestic warehouses have declined, and the downstream buyers have replenished inventories when copper prices fell. In terms of consumption, the peak season in March has seen a recovery in demand. But high copper prices are still one of the factors hampering consumption recovery. If copper prices do not rise sharply, consumption is expected to continue to recover. The price of copper is stable, and it is expected to remain rangebound widely around 68,000 yuan/mt.

Aluminium: The most-traded SHFE 2304 aluminium contract opened at 18,775 yuan/mt at last Friday’s night session before closing at 18,680 yuan/mt, up 25 yuan/mt or 0.13%. LME aluminium opened at $2,398/mt last Friday and closed at $2,393.5/mt, down $6/mt or 0.25%.

Fears of interest rate hikes in Europe and the US will continue to put pressure on the commodity market, but Chinese economic recovery and anticipations for favourable policies during the National People's Congress and the Chinese People's Political Consultative Conference (short as “Two Sessions”) will support aluminium prices. Considering that both fundamentals and macro front are intertwined with bullish and bearish factors, the short-term aluminium prices may maintain rangebound fluctuations.

Lead: Last Friday, LME lead opened at $2,125.5/mt and fell during the Asian trading hours, but then rebounded to around $2,140/mt during the European trading hours as the US dollar index fell. However, the prices of natural gas in Europe fell, and the LME lead continued to fall and finally closed at $2,118/mt, a decrease of 0.47%.

Last Friday, the most-traded SHFE 2303 lead contract opened at 15,310 yuan/mt and rose rapidly to 15,270 yuan/mt amid intertwining of long and short factors, and finally closed at 15,290 yuan/mt, an increase of 0.13%. Its open interest reached 59,920 lots, an increase of 546 lots from the previous trading day.

Zinc: LME zinc opened at $3,048/mt last Friday and closed down $3.5/mt or 0.11% at $3,043/mt. The trading volume was down to 5,920 lots, and open interest gained 471 lots to 194,000 lots. LME zinc inventory decreased by 600 mt to 35,750 mt.

The most-traded SHFE 2304 zinc contract finished at 23,490 yuan/mt last Friday night, up 210 yuan/mt or 0.90%. Trading volume was reduced to 40,942 lots, and open interest rose by 824 lots to 87,114 lots.

Last Friday, the US ISM non-manufacturing PMI for February recorded 55.1, higher than the expected 54.5. The final value of the US Markit services PMI exceeded expectations and recorded 50.6, beating the expected 50.5. Economists pointed out that after falling to a 27-month low in January, the inflation rate of goods and services re-accelerated in February to the highest level since October last year. As such, Fed’s semi-annual monetary policy report reiterated that it entailed continued rate hikes to bring the inflation rate down to 2%. If necessary, Fed will adjust the progress of scaling down balance sheet. Richmond Fed President Barkin said that the US benchmark interest rate may rise to 5.5-5.75%, which means another 100 basis points of interest rate hikes are likely, and that he did not expect a rate cut in 2023. In addition, former US Treasury Secretary Summers called on Powell to retain the option of raising interest rates by 50 basis points in March. China’s government work report proposed the main goals for this year's development: GDP growth rate at about 5%, and the CPI growth rate at 3%. In particular, efforts will be stepped up to expand domestic demand by prioritising the recovery and expansion of consumption.

According to China’s government work report, the targeted GDP growth rate this year was set as 5%, and the focus of the work was on the recovery and expansion of consumption as well as the stability of commodity consumption. Fundamentally, the production cuts at zinc smelters induced by the recent power rationing in Yunnan during the dry season has aroused market concerns over zinc supply. However, it still remains to be seen whether the consumption will be sustainable. Therefore, in the short term, zinc prices will maintain a range-bound trend.

Tin: The SHFE 2304 tin contract rebounded sharply above 200,000 yuan/mt last Friday night and close at 201,080 yuan/mt, up 0.55%.

The domestic tin inventory under warrants and social inventory increased further. The spot discounts of deliverable brands remained stable while that of small brands were still low. The market supply of imported goods were still insufficient.

The SHFE 2304 tin contract rebounded sharply above 200,000 yuan/mt last Friday night and close at 201,080 yuan/mt, up 0.55%. The open interest decreased significantly by 8,523 lots.

To sum up, demand stimulus policies are expected to be released intensively during the recent "two sessions", but it will take time for the downstream consumption of tin to improve. However, due to the impact of expectations, the market prices may fluctuate greatly.

Nickel: Nickel prices trended lower on frequently released news last week. On March 1, according to market news, it was learned that Russian nickel products were banned in LME US warehouses, but SMM research showed that LME warehouses in the US currently have no substantial inventory, so it cast no impact on nickel prices. On March 2, the news said that NORNICKEL nickel, the largest nickel producer in Russia, shipped goods to China in RMB. The spots were priced based on the mixed price of SHFE and LME. Nickel futures prices fluctuated greatly. The pricing method of NORNICKEL nickel was conducive to nickel prices returning to fundamentals. Affected by the news concerning NORNICKEL Nickel, the spot premiums and SHFE nickel prices fell sharply last Friday, and the intraday spot transactions showed an improvement. NPI traders got high in-plant stocks, and some were eager to dump their goods. On the demand side, according to SMM research, recent stainless steel transactions have been slack, and the traders were less willing to pick up goods, pushing up the market spot supply. In general, nickel prices trended lower owing to the news front, and the spot trading picked up.

[Disclaimer: The above representation and data is based on market information SMM believes to be reliable at the time of acquiring as well as the comprehensive assessment by SMM research team, and any and all information provided in this article is for reference only. This article does not constitute a direct recommendation for investment or any decisions in any form and clients shall act on their own discreet and any decisions made by clients are not within the responsibility of SMM.]