PHYSICALS WEEKLY - Cu/Zn under pressure in China, interest wanes before CNY

London 02/02/2016 - The looming Chinese New Year and the rally in underlying metal prices have started to affect the physical market - buying interest has waned this week.

Aluminium premiums have been firming in the US and Asia but tracked lower in Europe amid tighter LME spreads, which dampened the economics of cash-and-carry stock financing and released metal onto the market.

Spot business in China has come to a standstill, with many market participants already en route to their home towns to celebrate the Lunar New Year while port facilities are processing the last deliveries before the holiday period.

Copper and zinc premiums in Shanghai edged lower in thin trading activity while a lack of arbitrage opportunities has hit buying appetites.

"People are on the sidelines waiting for markets to go lower," a warrant trader said. "There is some short-covering but fundamentally it has not changed. Physical demand is dead."

"We might see some games going on during the Chinese New Year - a lot of big boys are out there especially for copper and zinc," he added.

Tin premiums have edged slightly higher in Asia and Europe but other markets are steady.

LME nearby spreads remain tight for all metals bar nickel - the benchmark cash/threes rates are all backwardated, with little interest in cash-and-carry business.

"The physical market is pretty dead - we will have to wait until after Chinese New Year and hope that business picks up then," the trader said.

COPPER IN HOLIDAY MODE IN CHINA, PREMIUMS UP IN US

• Copper premiums held more or less stable this week although downside pressure was evident in China due to a negative arbitrage and a lack of demand ahead of the Chinese New Year.
• Shanghai premiums could fall later this month should the expected post-holiday pick-up in demand fail to materialise, traders warned.
• Spot premiums were last quoted at $80-95 per tonne on a cost, insurance and freight (CIF) basis, down from $85-95 last week, with delivery centred on end-February and early-March.
• Rates in bonded warehouse held at $85-95. Many local traders continued to quote and offer at three-digit numbers but actual transactions were reported below that mark.
• The closure of the arbitrage window between LME and SHFE prices and new government measures to stem capital outflows and control the spread between the offshore and onshore yuan have left "no room for physical or currency arbitrage trades" - Chinese trader.
• The lingering backwardation in LME nearby spreads - three-month metal was at premiums of $5-11 over cash on Tuesday - also highlighted the increased selling pressure and reluctance to hold stocks.
• Warrant premiums eased by $5 to $10-20 in-warehouse in places such as South Korea and Rotterdam.
• In contrast, the US market firmed on tighter scrap availability and higher freight costs due to disruptions caused by winter storms. The Midwest delivered benchmark was last at 5.25-5.75 cents per pound, up from 5.0-5.5 cents previously, with local suppliers unsuccessfully pushing for 6.0 cents.
• European activity picked up after destocking carried over from 2015 and thanks to decent orders from the cable and power sector but premiums held stable at $50-55 per tonne CIF Rotterdam.

ALUMINIUM SLIPS AGAIN IN EUROPE AMID LME BACKWARDATION; STEADY IN US, ASIA

• Tighter LME spreads have reduced the attractiveness of aluminium inventory financing. This has put pressure on European premiums, while rates in the US and Japan held firm.
• On the LME, cash/threes and cash/March were last backwardated at $3.25 and $6.75 respectively.
• In-warehouse Rotterdam duty-unpaid and duty-paid premiums each fell $5 to $90-100 per tonne and $145-155 per tonne respectively.
• "The downtrend in Europe has continued. We still have the feeling that there is plenty of metal around as we get many offers and the backwardation gives bargaining power to the buyer" - European trader.
• The US remains the premier market for aluminium, with the Midwest premium holding firm at 9.0-9.5 cents per pound ($198 per tonne).
• "The [LME] spreads are the same on both sides of the Atlantic but premiums are going up in the US and down in Europe. I think that speaks to the difference in fundamentals [between the two regions]" - trader.
• A Rotterdam DUP premium of $90 and a US Midwest premium of $200 would be enough of a differential to justify diverting metal to America, he added.
• This year, the US will consume more than 5.5 million tonnes of primary aluminium but will produce less than 1 million tonnes at a handful of smelters. Alcoa, Century and Noranda have all announced production cuts recently.
• "There seems to be this persistent theme that demand is slowing [given recently soft US manufacturing data]. But my order book is full for the next three months. From our perspective, physical demand has been right where it should be. We would characterise demand as good and supply as tight" - US aluminium consumer.
• In Japan, premiums remain at $115-125 per tonne CIF although the yen slumped after the Bank of Japan moved rates to negative territory.
• "[Central bank intervention] alongside the recovery in oil market has caused the price of aluminium in yen terms to rocket. That said, I agree that premiums are still at $115-$125. I expect that the Japanese market will stay quiet until customers get comfortable with the current price level" - trader in Japan.

SHANGHAI ZINC PREMIUMS DIP AS IMPORT ARB CLOSES

• Zinc premiums edged lower in Shanghai this week - the import arbitrage ratio fell following a surge in LME prices.
• "The arb ratio has come down from almost 8.6 to 8.1 in the last 10 days, which makes imports totally not workable" - trader in Shanghai.
• CIF Shanghai premiums fell $5 to $105-125 per tonne amid slim demand for imports in the market.
• LME three-month prices have risen $185 per tonne in the past week while the equivalent SHFE contract is up 530 yuan, equivalent to $80.5 per tonne.
• "The biggest problem is the lack of liquidity, especially before the long holiday; so far based on the ongoing arb in London and Shanghai we see the premium has gone down" - second trader.
• In Europe, meanwhile, premiums remain steady at $130-145 per tonne DP FCA Rotterdam. Although some shorts have been covering while prices have been climbing, the market is still well supplied.
• "There's a bit more activity now that the LME [price] is increasing but premiums are still on a stable level" - European source.
• Elsewhere, India is seeing strong demand for non-LME, high-grade zinc ingots because domestic supply has tightened in recent weeks.
• Premiums for Iranian brand high-grade ingots have risen to $90-100 per tonne CIF Nhava Sheva from closer to $50 two weeks ago.
• "Offers for the Iranian material have increased due to interest from Indian traders who are looking for imports" - seller in Asia.

NICKEL PREMIUMS STURDY BUT LOWER GRADE MATERIAL GETS TIGHTER

• Premiums for nickel cathodes in Shanghai were stable ahead of the Lunar New Year, with spot demand largely flat in the days leading up to the holiday.
• Full-plate premiums in Shanghai's bonded zone remained at $150-170, with SHFE deliverable material - in particular Norilsk H1 cathodes - still largely in short supply.
• But the recent crackdown on the financing of offshore material has reduced demand - nickel in the bonded zone must be kept at the most reputable warehouses to secure financing, traders said.
• Still, availability of low-grade NPI has become increasingly tight, which in turn has tightened the ferro-nickel market - dwindling stocks of the former have forcing many stainless steelmakers to purchase the latter. Producers are now increasingly selling out of first-quarter-deliverable material.
• 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.
• Full-plate H1 cathodes remain scarce in Malaysia and Singapore, keeping the premium elevated at $30-50 per tonne in warehouse.
• Enquires in the European market for spot material remain sturdy, with the volatility in the price since the start of the year pushing the material below 8,000 euros and encouraging some dip-buying and stock replenishment, traders said.
• Similarly to Asia, specific grades are becoming tighter - the lack of ferronickel is also affecting the European market.
• Still, premiums remain low, particularly while the market is amply supplied. Deliverable material is averaging $30-45 for full plate in-warehouse Rotterdam and 4x4 cut cathode is still at $190-210.
• US melting grade premiums remain in a wide range. But cut cathodes have generally sold for around 12-16 cents per pound while briquettes are offered at 7-10 cents.
• "Premiums have been all over the board [this week]. I've been trying to keep them flat but it depends on the consumer, quality and their location. I am sure there have been cheaper sellers but the way people hedge can make it appear that they are selling at a significantly reduced premium" - US trader.

TIN PREMIUMS IN SINGAPORE, ROTTERDAM UP AS SPOT SUPPLY DRIES UP

• Premiums for tin ingots have risen in Singapore and Rotterdam - traders cite a shortage of immediately available material as the catalyst. 
• As well, on top of a cut to refined production of 17,000 tonnes by Chinese tin smelters, Beijing will provide a loan of around 2-3 billion yuan ($304-456 million) to several leading Chinese producers to carry out commercial stockpiling of 20,000-30,000 tonnes of tin, well-informed sources told FastMarkets.
• Premiums for 99.9-percent purity tin basis in-warehouse Singapore climbed to $60-90, in line with recent stock outflows and the gradual consumption of a large volume of Chinese units that reached the market towards the end of 2015.
• In Europe, the story is similar to Asia - consumers are finding material somewhat harder to source. In-warehouse Rotterdam premiums pushed higher to $350-400 per tonne for 99.9-percent purity tin, MSC grade pushed up to $325-375 and low-lead rose to $450-500.
• "This [higher premium] is mainly because there is less availability of spot material in Europe and Asia. In December/early January, people desperately wanted to get rid of material but those aggressive offers have stopped" - trader.

 LEAD PREMIUMS STEADY IN WELL SUPPLIED MARKET

• Lead premiums are largely unchanged but softened slightly in Taiwan over the past week, falling $5 to $95-105 per tonne CIF Taiwan for 99.97-percent material.
• In Europe, the market for spot tonnages is quiet, with warehouse warrants fetching $10-20 per tonne in Rotterdam and Antwerp. In the same ports, 99.97-percent lead ingots are $60-70 duty paid FCA.
• "There's not a huge movement in Europe and supply is still ample" - trading source.

 
(Editing by Mark Shaw)