London 12/04/2016 - Physical base metals markets enjoyed an increase in end-use buying and firmer premiums in China, where import arbitrage ratios improved, amid lower LME prices over the past week.
But traders are adopting more of a watching brief after a recovery in prices this week - all metals ended LME trading higher on Tuesday, with copper and aluminium reaching one-week highs and nickel its best in three weeks.
"There was activity when the price went down but since this has levelled out people are again in wait-and-see mode," a European trader said.
Risk appetite has improved this week amid higher oil prices and a weaker dollar - the dollar index is around six-month lows.
"It will be interesting to see what happens when we've had a bit of a rally on the LME - maybe it will have a negative impact on premiums," a trader in London said.
Chinese copper, aluminium and nickel upcharges all rose, which a trader in Europe attributed to arbitrage-related buying.
"The 'arb' has picked up and moved premiums with it," he said.
ALUMINIUM RATES SLIGHTLY HIGHER IN EUROPE, CHINA; EYES ON UNSTABLE SPREADS
- Rotterdam duty-paid aluminium premiums edged higher thanks to better forward spreads, with rates quoted at $135-150 per tonne, up $5 at the top end from last week.
- "We've seen a very small change on premiums in Rotterdam and the main reason is the spread - there's a bit of a contango - but the fundamental structure is still weak" - trader in Europe.
- On the LME, cash/three-months was last at $9.50 contango but whether this will last is a topic of debate.
- "I don't think a backwardation is just around the corner but we are very cautious. The spread is very volatile and different numbers [are in] play every day" - second trader in Europe.
- In contrast, premiums in Italy and Turkey were unchanged at $165-175 per tonne duty paid (DP) on a free-carrier agreement (FCA) basis and $130-140 DUP FCA respectively.
- Similarly, Japanese rates held at $107-115 this week, still below the recently settled second-quarter MJP benchmark of $115-117.
- In China, premiums climbed to $90-100 in bonded warehouse due to an improved physical arbitrage although this is an indicative number - no trades were reported this week.
- The physical arbitrage window is still closed but the loss incurred on imports now is around 400-500 yuan ($62-77) per tonne, down from around 1,000 yuan recently, various sources said.
- The US Midwest premium is tentatively holding at 8.0-8.5 cents per pound but the bias is to the downside because spot demand has dried up after a flurry of activity in March.
- After a lull in the first two months of the year, the US Aluminum Association's Index of Net New Orders of Aluminum Mill Products increased 8.8 month-on-month in March. But several market participants noted that the restocking cycle has already fizzled out.
- "March was a very strong month but things have cooled a little lately. I wouldn't say demand is bad or anything like that but the reloading has run its course and people aren't ready to come back for the third quarter" - US trader.
- The Midwest premium is unlikely to climb to nine cents in what is a robustly supplied market, a producer source said.
- "Canadian units are not leaving North America for Europe. Metal is staying here and filling inventories" - producer source.
- "[The pace of new] deals has fallen off. We haven't gotten many calls for spot [this week]. We tried to book at 8.25 cents on Friday afternoon for quick delivery but the customer bought at 8.0 [cents]" - second producer source.
SHANGHAI COPPER UPCHARGE RISES ON IMPROVED ARB
- Copper premiums have recovered from a nine-month low in Shanghai due to an improved arbitrage while US rates increased thanks to restocking and a tight scrap market.
- The Shanghai upcharge was last at $50-60 per tonne CIF, up from $40-55 a week ago - the drop in LME prices since last Thursday has narrowed the negative arbitrage ratio between the LME and the SHFE.
- "The arbitrage has improved from nearly a loss of $156 if you imports into domestic market to a loss of $15-31 today. That's the main reason for a slight upward trend in premiums" - trader in China.
- Traders have lifted their offers accordingly; there are fewer distressed sellers in the market.
- The improved arbitrage ratio will cap the upside in premiums, as will the arrival of more shipments of metal later this month.
- Since last Tuesday, LME-listed warehouses have taken delivery of 13,825 tonnes of copper -mostly, according to speculation, from Chinese smelters. The inflow may slow should the arbitrage ratio not worsen.
- Another 20,000 tonnes or thereabouts - mostly from Chinese smelters - has already been earmarked for delivery into LME-listed sheds, market participants claimed. This metal will take time to show up in the LME's stock data, according to smelting sources.
- In Europe, rates were stable at $50-55 per tonne CIF Rotterdam. A further decline in LME copper stocks might lift premiums in the near term.
- The range for the US Midwest copper premium increased this week to 5.5-6.0 cents per pound from 5.25-5.75 cents amid some modest restocking and a lack of scrap availability.
- "Scrap is getting really tight - No. 2 copper (Birch) is now only a 19-cent discount to Comex. We're hearing that [SDI LaFarga in Fort Wayne] has increased their rod production and they've been buying a lot of scrap. That's tightened the market quite a bit, which has supported cathode premiums" - US trader.
- Scrap dealers are holding metal off the market because they do not want to sell at a loss, a second US trader said.
- "[The US] is somewhat less bearish than it was in the first quarter but it's definitely not bullish" - second trader.
US ZINC PREMIUMS FIRM ON SEASONAL DEMAND
- US premiums for special high-grade zinc rose to 6.5-7.0 cents per pound from 6.0-6.75 cents due to some seasonal demand and expectations for higher LME prices.
- "Some people think that [LME] zinc is going to $2,500 [per tonne] so they're in the market looking for material now. We've had several consumers ask us to book decent-sized volumes" - US trader
- "It's a little firmer across the board. [US] consumers' inventories were a little light going into the second quarter. Also, you have to consider the cost of replacement in New Orleans. We're starting to see more metal move from New Orleans to Asia so there's not as much cheap metal there any more" - US trader.
- Upcharges on special high-grade zinc ingots elsewhere were unmoved this week despite more enquiries in Europe due to lower prices.
- "In the past couple of days when prices went a bit lower it was a bit more active but nothing to get too excited about" - trader in Europe.
- Premiums for zinc ingots in Europe remain at $130-145 per tonne duty-paid FCA in Rotterdam where they have been since January 19.
- With the import arbitrage ratio into China still firmly negative, there have been few sales there over the past week and premiums are still at low levels of $95-110 per tonne. But buyers are testing the water at lower levels.
- "I don't think anyone with cargo will actually sell lower because it just doesn't make sense - I think the premium will be maintained around this level; there is ample supply in the domestic market and bonded stocks aren't very low" - trader in Shanghai.
INDIAN LEAD DOWN ON IRANIAN IMPORTS
- Lead premiums in India have edged lower on an increase in Iranian imports but this could prove short-lived while prices generally trend lower.
- Premiums for 99.97 percent purity lead dropped $10 to $80-95 per tonne. Some Iranian material also reportedly traded below this level while non-Iranian lead of the same purity was quoted higher.
- Demand in India has improved over the past week - lower LME prices had the knock-on effect of reducing scrap supply to India.
- LME lead traded at a low of $1,680 per tonne on April 12, down from a high of $1,785 on March 28.
- "Scrap is quite tight now so that has really prompted enquiries for imported metal but the fact of the matter is Iran can't supply at these prices so the overall balance [in India] needs more" - trader in India.
- Demand for lead elsewhere is stable, with premiums in South Korea at $100-110 CIF.
- "We had some enquiries from East Asia - I think it's because of the lower prices and a shortage of scrap" - second trader.
POSITIVE ARB LIFTS SHANGHAI NICKEL RATES, RUSH ON OFF-GRADE CONTINUES
- In Shanghai, premiums for full-plate nickel cathodes were last at $150-160 per tonne CIF and in-warehouse in the bonded zone, up from $130-160.
- This increase reflects an open LME-SHFE arbitrage window, which is presenting traders holding SHFE-deliverable Norilsk Nickel H1 cathodes with profits of 200-300 yuan per tonne when imported, traders said.
- Premiums therefore edged higher in nearby Singapore, South Korea and Malaysia for the Russian cathodes - traders quoted premiums at $40-60 for full-plate material, up from $30-40 previously. The metal is frequently tight in the region while LME briquette stocks are plentiful.
- In Europe, rates for full-plate nickel were last at $50-60 while briquette premiums held steady at $30-60 although there were reports of some higher deals for large volumes.
- Still, the rush on cheaper forms of nickel continue - in Europe and China, high-grade ferronickel is commanding a $200 premium on 20-percent nickel content amid extremely limited supply of scrap and NPI, with the remaining iron content coming at zero cost.
TIN STEADY BUT DOMINANT WARRANT HOLDER, SUPPLY SITUATION CAUSING CONCERN
- Tin premiums are stable while the physical market remains quiet and illiquid - in Singapore, premiums for standard 99.9 percent purity tin ingots are steady at $90-120 per tonne in-warehouse over LME cash prices.
- Off-warrant stocks and the potential for more supply out of China continue to worry some market participants, with suggestions from some sources that there could be as much as 4,000 tonnes of material in non-LME sheds in Singapore in particular.
- "Demand has always been there and all pretty stable. Supply is the biggest concern, specifically China. There is no shortage of supply and more material coming out of China could really push the market down" - producer source.
- The squeeze in the tin market has also extended this week - the latest LME data shows that there is one dominant holder of warrants at 40-49 percent, up from 30-39 percent at the end of last week.
- In Europe, in-warehouse-Rotterdam premiums for three-nines and 99.85 percent ingots were stable at $350-400 and $325-375 respectively.
(Editing by Mark Shaw)