SMM Morning Comments (Feb 21): Base Metals Closed with Gains on Strong US Economic Performance

SHANGHAI, Feb 21 (SMM) – SHFE and LME base metals closed mostly with gains overnight. On the macro front, the U.S. dollar index fell as a number of strong economic data released earlier enhanced market expectations for the Fed to continue raising interest rates.

Copper: LME copper closed at $9,111/mt last evening, a gain of 1.13%. Trading volume was 13,000 lots and open interest stood at 262,000 lots.

The most active SHFE 2303 copper contract finished at 69,950 yuan/mt overnight, up 1.32%. Trading volume was 21,000 lots, and open interest stood at 124,000 lots.

On the macro front, the U.S. dollar index fell as a number of strong economic data released earlier enhanced market expectations for the Fed to continue raising interest rates.

As of Monday February 20, copper stocks in mainstream markets tracked by SMM increased 4,500 mt to 329,900 mt compared with Friday February 17. Despite limited arriving shipments of imported copper, downstream consumption has weakened, growing inventories. At present, the total inventory has increased by 133,300 mt compared with 196,600 mt before Chinese New Year holidays. Only Shanghai saw inventory declines over the weekend, while the inventory in Guangdong and Chongqing increased. Those in other regions did not change much. SMM understood that several copper rod plants stopped production due to overly high finished product inventory. This can be also reflected in the precipitous decline in daily average shipments from Guangdong warehouses. Although the recent performance of the US dollar index is strong, the domestic macroeconomic front is positive. Copper prices are expected to remain rangebound at high levels.

Aluminium: The most-traded SHFE 2303 aluminium contract opened at 18,730 yuan/mt overnight before closing at 18,775 yuan/mt, up 220 yuan/mt or 1.18%.

LME aluminium opened at $2,395/mt on Monday and closed at $2,462/mt, an increase of $72/mt or 3.01%.

On the supply side, aluminium smelters in Yunnan have begun to reduce production, and the production capacity is expected to be reduced by 670,000-800,000 mt, shoring up aluminium prices. The supply of goods in the spot market is relatively abundant. Aluminium ingot inventory data still showed a slight accumulation. Sellers began to hold back cargoes amid bullish sentiment. On the demand side, higher prices suppressed downstream buying interest. In terms of cost, the price of coal has stabilised and the price of alumina was relatively firm, diminishing expectations for cost collapse. On the macro front, the pace and magnitude of the Federal Reserve's interest rate hikes are still important guiding factors for the trend of aluminium prices. Generally speaking, with the entry of bulls and exit of shorts, it is expected that aluminium prices will remain firm in the short term.

Lead: Last night, LME Lead opened at $2,069/mt and rose 4.73% to close at $2,169/mt after hitting the lowest point at $2,060.5/mt and the highest point at $2,175/mt. The open interest rose 9,664 lots to 114,000 lots, and trading volume increased 970 lots to 4,981 lots.

The most-traded SHFE 2303 lead contract opened at 15,300 yuan/mt and closed at 15,375 yuan/mt, up 1.49%, after briefly hitting the lowest point at 15,260 yuan/mt and the point at 15,385 yuan/mt. Open interest fell 11044 lots to 45868 lots, and trading volume rose 2,256 lots to 35,218 lots.

Zinc: On the news front, China’s former Foreign Minister Wang Yi had informal contact with US Secretary of State Blinken at the request of the US side. Wang made clear China's unwavering attitude towards the incident of downed airship and asked the US to admit and resolve the damage to Sino-US relations caused by their abuse of force. The European Union was considering joint purchases of weapons to help Ukraine meet its ammunition needs. As more Fed policymakers called for further interest rate hikes, the market expected for another 75 basis-point hike before summer.

Overnight, LME zinc opened at $3,074/mt and closed up $59/mt or 1.91% at $3,140/mt. The trading volume was 6,238 lots, and open interest added 21,211 lots to 220,000 lots. LME zinc inventory decreased further by 375 mt to 29,475 mt.

Last night, the most-traded SHFE zinc contract shifted to 2304 contract, which opened at 23,300 yuan/mt and finally settled at 23,570 yuan/mt, up 395 yuan/mt or 1.7%. The trading volume was 50,000 lots, and open interest gained 2,139 lots to 78,311 lots.

As the natural gas prices continued falling, overseas smelters gradually stopped losing money. Moreover, the French Auby smelter with production capacity of 150,000 mt announced that it would resume production in early March, which confirms the potential increase in overseas zinc supply. But the recovery of consumption overseas was not ideal, and the support for zinc prices has weakened due to sufficient supply.

Domestically, the consumption is still bolstered, but market players shall be wary of the influence of overseas zinc prices on domestic ones.

Tin: The SHFE 2303 tin contract rebounded sharply by 7,260 yuan/mt last night. The most-traded SHFE 2303 tin contract rose 3.49% and closed at 215,100 yuan/mt, with the open interest decreased 6,686 lots to 41,852 lots.

The domestic tin inventory under warrants fell sharply. The spot premiums were still narrow and the imported goods were less cost-effective.

The SHFE 2303 tin contract rebounded sharply by 7,260 yuan/mt last night. The most-traded SHFE 2303 tin contract rose 3.49% and closed at 215,100 yuan/mt, with the open interest decreased 6,686 lots to 41,852 lots.

To sum up, despite the high social inventory, the sharp decline in warrant inventory provided support for SHFE tin prices. The upstream smelters has not yet fully recovered, and the raw material stocks of downstream enterprises have been digested to a certain extent. Imported tin continued to arrive, but imported goods were less cost-effective than the early stage. The overall demand for spot goods was still under recovery, and the discounts were relatively stable.

Nickel: SHFE nickel kept falling amid the expected sufficient nickel supply. Upstream enterprises were much more willing to ship, dragging down spot premiums yesterday. On February 20, the average price of SMM Ni 8-12% high-grade NPI was 1,350 yuan/mtu (ex-factory, tax included), flat from the previous trading day. Some stainless steel mills have set the NPI prices for March in the form of fixed orders. The sellers’ quotes remained almost unchanged, but the purchase prices offered by stainless steel mills fell slightly. On the demand side, according to SMM research, the news that stainless steel mills controlled the allocation of the goods last week boosted market confidence, and the #304 stainless steel trading was acceptable. However, processing plants purchased cautiously amid poor orders. Most alloy companies have basically completed restocking, hence these enterprises made fewer inquiries. To sum up, the pure nickel sector faces weak supply and demand. Nickel prices will move rangebound with occasional drops.

[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.]