SMM Morning Comments (Jan 4): Base Metals to Trend Lower as US Dollar Index Rebounds

SHANGHAI, Jan 4 (SMM) – Shanghai base metals mostly trended lower on Tuesday morning after US dollar rallied significantly. Meanwhile, their counterparts on LME performed similarly.

LME metals closed mixed in the trading on December 31 2021. Copper rose 1.48%, lead increased 0.17%, aluminium dipped 0.07%, and zinc fell 0.17%.

Copper: Three-month LME copper opened at $9,722/mt last Friday night, falling to the lowest point at $9,675/mt in the early trading, then rebounding to the highest point at $9,795/mt. It closed at $9,755/mt, up 1.48%. The trading volume was 6,684 lots, and the open interest was 252,000 lots. LME copper is expected to trade between $9,620-9,720/mt today. SHFE market was closed for the New Year’s Day holiday last Friday night, and it is expected to trade between 69,800-70,400 yuan/mt today.

The rapid spread of COVID-19 variant Omicron still troubled the market, but the investors were more concerned about the Fed’s tightening monetary policy. The US dollar index pulled back and then rallied significantly last Friday, likely to force down the copper futures. The spot transactions were sluggish approaching the holiday, the high premiums trended lower. The transactions are expected to rebound after the holiday, and the traders may hold the premiums firm.

Aluminium: LME aluminium opened at $2,811/mt last Friday and closed at $2,813/mt, down $2/mt or 0.07%. The most-traded SHFE 2202 aluminium contract opened at 20,445 yuan/mt during last Friday’s night session, with the highest and lowest prices at 20,525 yuan/mt and 20,330 yuan/mt before closing at 20,380 yuan/mt, down 80 yuan/mt or 0.39%.

The domestic aluminium output remained at a low level. The operating rates of downstream aluminium processing enterprises were relatively stable, while cargo arrivals at the major consumer areas declined, reducing the aluminium ingot social inventory by 65,000 mt last week. On the cost side, alumina prices stopped falling.

The short-term focus is still on potential aluminium production reduction caused by the energy shortages in Europe. The domestic aluminium inventory is likely to continue to decline due to fewer arrivals and restocking ahead of the Chinese New Year. Aluminium prices are likely to inch higher in the short term.

Lead: Three-month LME lead opened at $2,292/mt last Friday night, falling to $2,274/mt in the Asian session, and then kept rising during the European session. It closed at $2,310/mt, up 0.17%.

Three-month LME zinc rose 0.4% to settle at $3,536.5/mt last Friday, with open interest decreasing 317 lots to 251,000 lots. LME stocks across LME-listed warehouses fell by 175 mt or 0.09% to 199,575 mt. Therefore, there are still many uncertainties in the European natural gas issue. If the Nord Stream 2 plan fails to pass in the short term, it will be difficult to fundamentally change the power shortage issue. Smelters may extend production cuts if the electricity prices increase in Q1. LME zinc is expected to move between $3,490-3,540/mt.

Zinc: The most-liquid SHFE 2202 zinc contract fell 0.17% to settle at 24,125 yuan/mt, with open interest decreasing by 8,028 lots to 89,750 lots. However, there are also recent reductions on the supply side. Sihuan plans to reduce the production by 30% from January to May in 2022. Jilang will not be able to resume the production in the short term and is expected to gradually recover after the Chinese New Year. Hanzhong is still under production reduction, and is unlikely to recover in the short term. The most-traded zinc contract is expected to move between 22,900-23,400 yuan/mt today and #0 domestic Shuangyan zinc may trade at premiums of 110-130 yuan/mt over the SHFE 2201 zinc contract.

Tin: The most-traded SHFE 2202 tin contract rose 2.39% last week with the inflows of capital. Based on the current rigid demand in the spot market, the most-traded SHFE 2202 tin contract is expected to remain firm.