SMM Morning Comments (Jul 25): Base Metals Mostly Closed with Gains Subsiding Rate Hike Expectations

SHANGHAI, Jul 25 (SMM) – SHFE and LME base metals closed mostly with gains as the US dollar index kept falling gradually last week, mainly because the market's expectation of a 100-basis-point rate hike by the Fed continued to cool down.

LME copper jumped 1.24%, aluminium gained 0.8%, lead rose 0.7%, and zinc added 1.13%.

SHFE copper jumped 1.7%, aluminium gained 0.92%, lead rose 0.83%, and zinc added 1.89%.

Copper: LME copper opened at $7,350/mt last Friday and fell to $7,388/mt at the end of the session after climbing to $7,530/mt. At last, the contract closed at $7,389.5/mt, up $90.5/mt, or 1.24%. Trading volume was 18,000 lots, and open interest stood at 232,000 lots.

SHFE 2208 copper contract opened at 56,880 yuan/mt last Friday night, and went higher along with the rising LME copper to 57,990 yuan/mt, while the longs and shorts competed at 57,800 yuan/mt. At last, the contract closed at 57,410 yuan/mt, up 960 yuan/mt, or 1.70%. Trading volume was 57,000 lots, and open interest stood at 104,000 lots.

On the macro front, the US dollar index kept falling gradually last week, mainly because the market's expectation of a 100-basis-point rate hike by the Fed continued to cool down, and the European Central Bank raised the three key interest rates by 50 basis points beyond expectations, boosting the euro. However, those fluctuations in Europe had a very limited impact on copper prices which remained rangebound at low levels last week. The market shall pay attention to the results of the Fed’s meeting at 02: 00 on July 28, which may guide the trend of short-term copper prices.

In the spot market, although the spot imports gained slight profits, the inflow of imported copper was slow last week, thus the market supply was tight, and the traders raised the premiums from 200 yuan/mt to 300 yuan/mt. Approaching the end of the delivery of long-term orders this week, the trading activity is likely to fall, and the tight supply will be eased somewhat. It is expected that the premiums will drop from highs.

Aluminium: The most-traded SHFE 2208 aluminium contract opened at 18,050 yuan/mt at last Friday’s night session and rose to 18,225 yuan/mt before closing at 18,160 yuan/mt, up 165 yuan/mt or 0.92%.

LME aluminium opened at $2,437/mt last Friday and closed at $2,459/mt, an increase of $19.5/mt or 0.8%.

Some aluminium smelters in Sichuan have reduced production, but oversupply pressure remains strong. In terms of demand, downstream consumption remained poor. The operating rates of major aluminium processing companies were basically stable last week. Given the poor fundamentals, it is expected that aluminium prices will remain under pressure.

Lead: LME lead opened at $1,998.5/mt last Friday and rose by 0.7% to $2,010/mt after hitting the lowest point at $1,989/mt and the highest point at $2,027.5/mt last Friday. The open interest increased by 436 lots to 88,663 lots from the previous trading day.

The most traded SHFE 2209 lead contract opened at 15,200 yuan/mt and rose by 0.83% to 15,230 yuan/m, after briefly hitting the highest point at 15,295 yuan/mt and the lowest point at 15,150 yuan/mt. The open interest increased by 6,145 lots to 49,537 lots from the previous trading day.

Zinc: LME zinc closed at $2,992/mt last Friday, up $33/mt or 1.13%. The open interest rose 291 lots to 203,000 lots. Overnight LME inventory fell 350 mt to 72,475 mt, up 0.82%, staying low.  

The most traded SHFE 2209 zinc contract closed at 22,700 yuan/mt overnight, up 420 yuan/mt or 1.89%. The open interest rose 6,537 lots to 90,200 lots. On the supply side, smelting cost was under great pressure after electricity and natural gas prices in Europe surged, which will weigh on future supply. On the consumption side, weakness extended, and the three major downstream sectors still awaited the pivot. Zinc prices lacked momentum in the near term.

Overnight, ECB President Lagarde said in an interview with German media that the ECB will continue to raise interest rates until inflation falls back to the 2% target level. US Treasury Secretary Yellen said that US economic growth is slowing and she acknowledged the risk of recession but also said that an economic downturn is not inevitable. Under sanctions adjustments agreed by EU member states, Rosneft and Gazprom will be able to ship oil to third countries, a move aimed at mitigating global energy security risks. The preliminary US composite PMI plunged to 47.5 in July from a final reading of 52.3 in June, much weaker than expected. China's State Council: The economy is at a critical point of stabilisation and recovery, with priority given to ensuring that the goal of stable employment and prices.

Tin: The most-traded SHFE tin contract rebounded at last Friday’s night session, and closed at above 190,000 yuan/mt. The open interest declined with the outflows of capital. Domestic tin ingot social inventory continued to fall last week, while LME tin inventory remained largely stable. Domestic tin smelters are gradually resuming production. Trades in the spot market were poor. The import profit window remained closed. To sum up, the current market supply and demand are basically balanced. The impact of the resumption of production of smelters has not yet emerged. The short-term tin prices are likely to move sideways.

Nickel: On the macro front, the Fed's statement last Friday that the next interest rate hike would be 75 basis points suppressed nonferrous metals prices. On the supply side, due to the continuous surge of pure nickel futures, the premiums of domestic pure nickel were lowered, improving the market sentiment. The price ratio gradually recovered, and the spot imports gained considerable profits even though the US dollar was high. For the NPI, the prices were still at a stalemate, and the plants suffered huge losses due to the high cost, so they were more willing to hold firm prices. In addition, the overall supply remained weak as the plants cut or suspended their production to varying degrees. On the demand side, in terms of stainless steel, the prices of #201 cold-rolled in the Foshan market were raised by 50 yuan/mt, and the market saw more trading. In the Wuxi market, the prices and transactions did not change much. As for the alloy, the purchases were good owing to the low futures prices last week.  To sum up, the recent macro factors have seriously affected nickel prices, and the supply of pure nickel becomes tight due to the recovery of demand. The interest rate meeting to be held at the end of this month will be the key to the macro sentiment. At present, the LME nickel　prices have not yet returned to the fundamentals, and the probability of large fluctuation still exists. When the LME nickel prices return to normal, SMM will resume the price forecast.

[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.]