PHYSICALS WEEKLY - Ali premiums rebound in US, Chinese interest supports nickel

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London 26/01/2016 - The approaching Chinese New Year started to affect physical metal business this week, with a slight recovery in underlying prices and lingering backwardations also contributing to limit buying interest.

Aluminium premiums made a marked recovery in the US, trading back above 9.0 cents per pound for the first time this year following the major snowfall on the East Coast and recent production cuts. But apart from a small uptick in Japan, premiums were more or less stable everywhere else.

Copper premiums were steady at just under the $100 mark in Shanghai while nickel remained supported by import demand in China, although rates in Shanghai eased from six-month peaks.

There was no change in other metals premiums, perhaps not helped by a technical rally on the LME where copper hit its highest in three weeks above $4,500 per tonne and zinc and tin rose to their best so far this year.

LME nearby spreads also remained tight for all metals bar nickel, with copper, tin and zinc still showing backwardations on the benchmark cash-to-three-month rates, making cash-and-carry trades unprofitable.

On that front, all eyes were on an emergency LME warehouse committee meeting scheduled for this Friday, when operators will have one last chance to reduce their rent and free-on-truck (FOT) charges before these go live on April 1 - Metro, in particular, could reconsider its proposed 33-percent rent increase, FastMarkets understands.

There were also a lot of talk about the likely impact of new restrictions from Chinese authorities - they have banned the use of offshore warehouse receipts for financing business in China in an attempt to halt the depreciation of the offshore yuan.

This may prompt Chinese holders of metal stocks across Asia - in Johor and Taiwan in particular - to ship material to China, some pointed out.

For now, however, trading volumes are likely to shrink as the Chinese New Year holidays near.


ALUMINIUM PREMIUMS HIT ONE-MONTH HIGH IN US, CLIMB IN ASIA

  • Spot aluminium premiums in Asia recovered and US rates increased eight percent on average due to tight supply after a series of production cuts.
  • The US is again emerging as the premier market for aluminium, with the Midwest premium spiking to 9.0-9.5 cents per pound ($198 per tonne) from 8.25-8.75 cents a week ago.
  • "Looks like my call of 10-cent Midwest premiums is going to happen pretty soon. Not a lot has changed fundamentally over the past two weeks so this rise is more emotional than anything else. But it is feeling a little tighter in the US and these cuts to supply will eventually be felt" - US trader.
  • This year, the US will consume more than 5.5 million tonnes of primary aluminium but will produce less than 1 million tonnes at only a handful of smelters. Alcoa, Century and Noranda have all announced production curtailments recently.
  • Several market participants reported booking solid spot volumes at premiums above 9.0 cents during the Platts Aluminium Symposium last week in Florida.
  • But the increase in premiums could be capped by another wave of imports. Some European and Middle Eastern supply has already been diverted to the US, several participants noted.
  • In Japan, premiums rose to $115-125 per tonne CIF from $105-115 last Tuesday
  • "Premiums in Japan have been recovering and the spot market has been $5-10 higher than Q1 MJP. We think things are starting to improve"- producer.
  • In Europe, premiums have been stable at $95-105 in-warehouse Rotterdam duty-unpaid and at $150-160 for duty-paid material.
  • In the LME spreads, cash-threes was last around $1 contango while there was a small backwardation of $0.5 for cash-March.
  • "Cash-to-carry business is no longer profitable and people would not be happy to keep high stocks on hand. With the stricter LME warehouse rules and shorter queues, it's really painful to play the old games" - physical trader.
  • "We actually see good consumption demand in Europe but the financing side has been very weak due to tight spreads - it has been very volatile" - trader in Europe.
  • Supply tightness has eased slightly in southern Europe - stocks have flowed southwards to capture higher premiums during the past month. Premiums have eased to $195-200 in North Italy but are around $200-205 in the south of the country.

COPPER PREMIUMS MOSTLY STABLE, MARKET WATCHES BANS ON OFFSHORE WAREHOUSE RECEIPTS

  • Premiums for copper cathodes held at $85-95 CIF while rates in bonded warehouse edged $5 lower to the same range in Shanghai.
  • A new ban in China on offshore warehouse receipts for financing deals and a closed physical arbitrage window between the LME and the Shanghai Futures Exchange (SHFE) combined to lower the rate.
  • There was some confusion over the extent of China's new regulation regarding offshore warehouse receipts. Some traders said that only bills of lading (CIF cargoes) can now be used for financing while others believe stocks in China's bonded zone are still acceptable for financing business. All agreed that offshore warehouse receipts in locations such as Malaysia or Taiwan are no longer acceptable.
  • Meanwhile, arbitrage deals generated a loss of around $21 per tonne on imports on Tuesday, a second local trader said.
  • Since end-user demand is widely seen remaining slack ahead of the Chinese New Year, premiums are unlikely to pick up soon.
  • "I don't feel people are restocking or will restock before Lunar New Year as the backwardation makes the holding costs high" - third trader in Shanghai.
  • In South Korea and Japan, demand for non-LME-registered copper recently improved - traders increasingly prefer the cheaper material to reduce their costs and widen profit margins.
  • Off-grade African brands traded in the South Korean spot market with CIF premiums of around $20-30 while better-quality Chilean brands traded around $60-70.
  • In contrast, the European market is generally quieter, with CIF Rotterdam rates staying at $45-55.
  • The US Midwest copper cathode premium remains mired at a four-year low of 5.0-5.5 cents per pound while demand remains slack and cash-strapped producers and traders offer competitive prices to generate cash-flow.
  • "In general, it's a 5.0-5.5 cents market but I'm sure there are pretty good deals out there. There has been some talk that material has been offered at the Mexican border for Comex flat. Although there really aren't many consumers in the market" - US trader.

US MIDWEST ZINC PREMIUM DROPS; EUROPE, ASIA STAGNANT AMID SPREAD TIGHTNESS

  • Zinc premiums across the world were largely unchanged amid tighter LME spreads this week although the US Midwest premium has now dropped firmly below seven cents.
  • The US Midwest delivered zinc premium has fallen to 6.5-7.0 cents per pound from 6.75-7.25 cents while several traders aggressively seek market share. 
  • "I'm hearing about offers in the low 6.0 cents - there are a couple [of traders] who are trying pick off consumers. But that's not something I'm getting involved in. We don't need a price war right now - I still wouldn't sell below 6.5 cents" - US trader
  • LME nearby spreads have also tightened - cash-threes was last in a $0.50 backwardation, down from a $2 contango last week, making it less profitable to hold stocks over time and keeping downside pressure on premiums, especially in Europe.
  • Rotterdam remained at a premium of $85-100 for duty unpaid metal on a free carrier agreement (FCA) basis while duty-paid material was also stable at $130-145.
  • In China, some traders noted a slight uptick in demand before the Spring Festival but the premium in Shanghai remains at $110-130. Still, very few spot parcels have actually changed hands.
  • "End-user demand is very bad at the moment, especially with Chinese New Year coming. Domestic demand is simply very weak. I don't think many trades are happening at these numbers"- trader in China.
  • As well, physical and currency arbitrage opportunities have closed, piling further pressure on an already-weak spot market.
  • Pressure is building on the premium for metal in Jebel Ali, with some trading companies said to be offering competitive premiums in the Middle East.

LEAD PREMIUMS STATIC, CONSUMERS WELL STOCKED BY LONG-TERM CONTRACTS

  • Lead premiums were unchanged globally this week, with traders reporting largely thin demand for spot parcels.
  • Consumers are reportedly well covered by long-term contracts while tight LME spreads - cash-threes is in a marginal backwardation - also dousing any immediate demand for the metal.
  • "I don't see any change in premiums across the board for lead - I saw a couple of extra enquiries for material pre-Chinese New Year; other than that, there's not much happening"- trader.

SHANGHAI NICKEL PREMIUMS DIP ON PBOC REGULATION

  • Premiums for nickel cathodes in Shanghai have softened in the build-up to the Lunar New Year and after the PBoC moved to close China's onshore-offshore currency arbitrage.
  • Full-plate cathode premiums in Shanghai's bonded zone slipped $10 to $150-170.
  • "A bill of lading remains usable but if you store the metal in an offshore warehouse that is no longer acceptable for financing" - trader in Shanghai.
  • Still, premiums remain close to last week's six-month high in Shanghai amid limited availability of SHFE-deliverable nickel, much of which has been tied up in financing deals until this week's policy change.
  • Elsewhere in Asia, premiums for nickel briquettes remain subdued; the vast majority of LME warrants in the dominant location of Malaysia are for this form.
  • But it remains difficult to pick up full-plate cathodes in Malaysia and Singapore, which are now both quoted at $30-50 per tonne in warehouse.
  • The European market is starting to pick up after a slow start to the year, with some demand seen on the rallies of the past two days. But premiums remain low, averaging $30-45 for full plate in-warehouse Rotterdam and 4x4 cut cathode still at $190-210.
  • "People are starting to get a better handle on order books… but there's no real spark to boost sentiment or premium. There's still a lot of uncertainty out there" - seller.
  • The US remains a bifurcated market, with a wide spread between cut cathodes at 12-16 cents per pound and briquettes, which are offered at 7-10 cents.

TIN MARKET SUBDUED DESPITE SUPPLY CUTS

  • Premiums for tin ingots have failed to react to recent production cuts in China and other countries such as Indonesia and Peru.
  • Chinese tin smelters announced last Wednesday a cut to refined production of 17,000 tonnes. But premiums have failed to rally; 99.9-percent purity tin basis in-warehouse Singapore is still at $55-75 despite recent stock outflows.
  • "I still think that there are plenty of stocks out there - they might not be freely available but they are there and may leak out into the market" - trader.
  • In Europe, demand from consumers remains subdued, with concerns over the European steel industry reducing the need for spot tonnages.
  • In-warehouse Rotterdam premiums remain at $325-375 per tonne for 99.9-percent purity tin.
  • "The market has started slowly since the beginning of 2016; we have seen some requests but it's not a lot for the moment" - trader in Europe.


(Editing by Mark Shaw)



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