SMM Morning Comments (Dec 6): Base Metals Closed Mixed amid Strong US Economic Readings

SHANGHAI, Dec 6 (SMM) – LME and SHFE base metals closed mixed amid strong US economic readings disclosed overnight. Specifically, the US ISM non-manufacturing PMI in November was 56.5, and service industry activity also picked up in November. A series of data were better than market expectations, enhancing the market’s anticipation that the US Fed will still raise interest rates aggressively.

LME copper fell 1.32%, aluminium dropped 0.16%, lead jumped 0.81%, and zinc advanced 0.26%.

SHFE copper fell 0.72%, aluminium dropped 1.92%, and zinc slid 0.61%.

Copper: LME copper opened at $8,457.5/mt on Monday and dropped to a low of $8,343.5/mt after climbing to $8,514/mt. At last, the contract closed at $8,360/mt, down 1.32%. The trading volume was 18,000 lots, and open interest stood at 246,000 lots.

SHFE 2301 copper opened at 65,950 yuan/mt overnight, once hitting the lowest and highest of 65,590 yuan/mt and 66,850 yuan/mt respectively. At last, it closed at 65,740 yuan/mt, down 0.72%. The trading volume was 26,000 lots, and open interest stood at 143,000 lots.

On the macro front, the US ISM non-manufacturing PMI in November was 56.5, and service industry activity also picked up in November. A series of data were better than market expectations, enhancing the market’s anticipation that the US Fed will still raise interest rates aggressively. As a result, the US dollar rose, which was bearish for copper prices.

On the fundamentals, as of Monday December 5, SMM copper inventories in major Chinese markets fell 5,300 mt to 107,400 mt compared with last Friday. Lower inventory in Shanghai was caused by the small volume of customs clearance and the exports of domestic copper. In Guangdong, arrivals of goods were limited owing to the maintenance of the surrounding smelters, and downstream consumption improved. Consumption may recover slightly amid the relaxation of COVID-19 control measures in various regions. Copper prices will remain rangebound amid the weak fundamentals and the impact of macro factors.

Aluminium: The most-traded SHFE 2301 aluminium contract opened at 19,200 yuan/mt overnight and rose to 19,335 yuan/mt before closing at 19,240 yuan/mt, down 30 yuan/mt or 0.16%.

LME aluminium opened at $2,565/mt on Monday and fell to $2,510/mt before closing at $2,507/mt, down $49/mt or 1.92%.

Aluminium inventory remained low, with little possibility of large accumulation in the near future. Although the domestic pandemic controls are gradually relaxed, the downstream demand has not yet improved significantly. Trades in both aluminium ingot and billet markets were inhibited by the high aluminium prices. However, downstream demand is expected to gradually recover due to loosening pandemic controls. Therefore, aluminium prices are expected to fluctuate strongly.

Lead: Overnight, LME lead opened at $2,210/mt. As the US dollar index fell and the SHFE lead prices rose, LME lead fluctuated strongly and rose to the highest point at $2,240.5/mt. In the European trading hours, as the US non-agricultural data was better than expected, the US dollar index rose. Therefore, LME lead fell to $2,208/mt, but then gradually rebounded and closed at $2,231/mt, up 0.81%.

Overnight, the most-traded SHFE 2301 lead contract opened at 15,935 yuan/mt, dragged down by the weak LME lead. Coupled with the divergence of domestic futures and spot prices, SHFE lead fell rapidly to 15,920 yuan/mt. Amid the low lead inventory and weak consumption expectations, SHFE lead fluctuated between 15,935-15,985 yuan/mt, and finally closed at 15,935 yuan/mt. The open interest decreased 1,248 lots from the previous trading day to 87,222 lots.

Zinc: LME zinc closed at $3,115/mt on Monday, up $8/mt or 0.26%. The open interest fell 677 lots to 201,000 lots. LME zinc inventory fell 600 mt to 39,750 mt.

The most traded SHFE 2301 zinc contract closed at 24,430 yuan/mt overnight, down 150 yuan/mt or 0.61%. The open interest fell 1,949 lots to some 119,000 lots. On the supply side, the smelters had enough raw materials with the inflow of imported zinc concentrate earlier, but some were shut down due to pandemic outbreak, which also restricted the circulation of cargoes. On the consumption side, some downstream players took an early New Year holiday amid poor orders. In the spot market, zinc prices remained high despite small drops, but the market players were still mainly wait-and-see amid falling spot premiums.

Overnight, the Russian Ministry of Defence issued a statement saying that Ukraine had sent drones to attack military airports in Russia's Ryazan and Saratov regions that morning, but they were intercepted by Russian air defence systems. The "New Federal Reserve News Agency" published an article saying that payroll pressures will push the Fed to let interest rates rise above 5% next year, higher than investors' current expectations. The market expects the Fed's terminal rate to return to 5%, up about 10 basis points from the previous session.

In China, the Xinhua Times: It is important to optimise prevention and control measures, and build confidence in fighting the pandemic. With the weakening pathogenicity of Omicron virus, the popularity of vaccination as well as the accumulation of experience in pandemic prevention and control, the prevention and control of the pandemic in China is facing a new situation and new tasks. The most difficult period has passed. According to CCTV, citing experts, the proportion of pneumonia or severe and critical illnesses caused by the variant strain of Omicron is now relatively low compared to the period of the global flu epidemic in 2009.

Tin: Overnight, SHFE tin went down and closed at around 194,000 yuan/mt. Longs and shorts exited the market at the current high prices. Domestic tin ingot social inventory continued to increase. Discounts in the spot market expanded. LME tin inventory fell slightly. Overseas premiums fell slightly. The import window remained closed. Given the poor spot market and sentiment, SHFE tin is unlikely to rise.

Nickel: On the supply side, the price difference between domestic and overseas markets was large, and the imports of pure nickel suffered huge losses, tightening the imported pure nickel supply. Besides, affected by the extremely high futures prices, the suppliers were less willing to ship. In terms of NPI, according to SMM survey, the industrial electricity prices in some areas rose in winter, and the prices of auxiliary materials also grew continuously. Therefore, the production cost of NPI plants remained high, and most factories were at a loss. On the demand side, in terms of stainless steel, with the rise of the futures prices, the 300-series stainless steel trading was relatively hot last weekend. The intraday spot transaction was favourable, and some downstream companies began to restock in small quantities. The rigid demand for pure nickel from military alloy companies still existed, but the demand from the civil alloy sector was less than expected amid the high nickel prices. To sum up, pure nickel is currently in a state of tight supply and weak demand. Although the recent pure nickel prices fluctuated with some ups, the long-term negative feedback of the industrial chain may limit the upward space of the prices.

[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.]