PHYSICALS WEEKLY - Markets picking up pace at start of Q3, copper up in Shanghai

London 06/09/2016 - The physical metal markets are entering their busy season amid plenty of market-moving news, including labour unrest in Chile, fourth-quarter major Japanese port (MJP) aluminium supply negotiations and rumours that the Philippines government might close more nickel mines.

In copper, premiums in Shanghai are trending higher after sizeable shipments of the metal from Chinese smelters to LME warehouses tightened the domestic market, which in turn cracked opened the arbitrage window.

"Shanghai is up for sure. The arb opening always gives it a kick but the increase has been small so far and I'm not sure how long it will last. We've gotten higher offers but nothing that we want to cash in on yet," one Asian trader said.

Market participants are also keeping an eye on Chile, where production could drop due to strikes at Anglo American's Los Bronces (which has capacity of 437,800 tonnes per year) and Codelco's El Salvador (49,000 tonnes per year) mines.

The main topic in aluminium is talks for fourth-quarter ingot supply in Japan. One producer has tabled an initial MJP offer to buyers at $80 per tonne on a cost, insurance and freight basis, which is below the initial offer of $82 that Rio Tinto Alcan made last Tuesday and 10 percent below the third-quarter settlement.

In nickel, several miners in the Philippines have been suspended for failing to comply with environmental safety standards, according to the Department of Environmental and Natural Resources (DENR).

Still, nickel premiums were steady in Europe and China but were slightly lower in Southeast Asia warehouses as the negative SHFE-LME arbitrage has tempered demand. But premiums were modestly higher in the US on a slight improvement in September demand.

In zinc, premiums come under downward pressure in India, Europe and the US - suppliers are offering fresh metal to take advantage of higher LME prices.

In lead, a bout of tightness in the 99.9-percent market reflects Korea Zinc keeping more tonnage at home to cover a domestic shortage that has resulted from cuts at secondary smelter.

ZINC PREMIUMS A TOUCH SOFTER IN US, INDIA, EUROPE

• Zinc premiums edged lower this week in the US, India and Europe - high LME prices continue to encourage offers and deter buyers, while spot business in China was stable and illiquid.
• In the US, the premium for special high-grade (SHG) zinc slipped to 6.25-6.75 cents per pound from 6.5-7.0 cents previously, with the seasonal slump extending into September.
• "Demand over the summer wasn't very good so there are not many [consumers] looking to restock. So we're in a situation where demand is weak, supply is available and prices are perceived as being too high" - US trader.
• In Europe, duty-paid premiums in Rotterdam were last at $125-140 per tonne on a free carrier arrangement (FCA) basis, down slightly from $130-140, where they had been for four months, reflecting the increased availability of various brands and origins. Some ingots of Spanish origin that had been re-imported into Europe from New Orleans were offered at even lower premiums but were not in great demand amid questions over their duty, date and quality status, sources noted.
• "There's no demand in China - the spot market there has been dead for 4-5 months - and premiums went down in the US. A lot more people have been selling in Europe and so we now have excess supply here" - European consumer.
• The tightness in LME spreads, albeit less strong than last week, is also acting as a deterrent for stock holders to keep or add to their material. Cash/threes was last at $3.50 contango but cash/September and cash/October remained in backwardation.
• In Asia, meanwhile, premiums remained under pressure from a rise in exports from Hindustan Zinc and growing Korea Zinc production.
• Spot rates in Shanghai narrowed to $95-105 per tonne on a cost, insurance and freight (CIF) basis to from $90-110 albeit with very transactions reported and with a very wide spread between offers and bids. The LME-SHFE arbitrage window remains shut.
• In India, premiums dropped to $155-175 CIF for duty-free material from $170-190 previously due to lower demand for galvanising and excess supply from Asian producers. Steel mills were reportedly grappling with the high LME price.
  
  

COPPER PREMIUMS HIT ONE-MONTH HIGH IN SHANGHAI, STABLE ELSEWHERE

• Copper premiums have climbed in Shanghai due to an improved arbitrage window between the LME and the SHFE while rates were unchanged in other locations.
• In Shanghai, rates reached a four-weeks high at $45-55 per tonne CIF, up from $35-50, due to the improved arbitrage - weaker LME prices have been pushing the ratio higher, which briefly opened the window.
• "Trading has definitely more active. A lot of people have been offering and bidding and we have seen some valid trades" - trader in Shanghai.
• But some traders are doubtful about how long the window will be open - margins remain slim.
• Stocks in LME-listed warehouses have continued to grow, with around 81 percent thereof now stored in Southeast Asia warehouses, up from 28 percent at the start of the year. 
• In Europe, rates were unchanged at $45-50 per tonne CIF Rotterdam although enquiries have picked up after consumers returned from their holidays.
• The US Midwest delivered copper premium was steady at 5.25-5.75 cents per pound - few consumers are in rush to buy spot metal following the holiday weekend.
• "People are taking all their contracted material but no one has come back looking for extra. Maybe it will pick up later this month but right now it's quiet" - US supplier.

PRESSURE ON ALUMINIUM HOLDERS EASE ON WIDER CONTANGO, MJP Q4 OFFERS BEGIN AT $80-82

• The US Midwest premium remains pinned at seven-year low of 5.75-6.25 cents per pound and there is some significant disagreement over the market's near-term direction.
• The bulls argue that premiums have to rise above six cents because anything lower is loss-marking on a freight basis while the improved contango structure now allows for more cash-and-carry financing.
• But there are plenty of pessimists - they cite record high imports, unusually soft seasonal demand and a levelling-off in US auto sales as justification for an extended period of low premiums. 
• It was a quieter week across the Asian markets this week while fourth-quarter supply negotiations to Japan heat up.
• One aluminium producer tabled an initial offer to buyers for fourth-quarter ingot supply at $80 per tonne CIF major Japanese ports (MJP), following Rio Tinto Alcan's offer of $82 in the middle of last week.
• This remains much higher than the spot market, which was last assessed at $65-75 per tonne, and far above where consumers are bidding closer to $70.
• "We are not optimistic at all about the fourth-quarter negotiations. We have a target level of around $70 but I suspect it will conclude around $75" - local source.
• Buyers will now await the remaining initial offers from producers before the next stage of negotiations, with a view to reaching a conclusion by the end of this month. 
• In Southeast Asia, warrant premiums are static at $0-5. In Korea in particular, availability has jumped after a net 149,675 tonnes of deliveries into LME-listed warehouses in Busan so far this year compared with just 13,325 tonnes in 2015.
• In Europe, premiums are unchanged in Rotterdam at $110-120 per tonne duty-paid in-warehouse and $60-70 duty-unpaid in-warehouse. 
• Better spreads - the benchmark cash-3s is now at $16 - have relieved the pressure on some of the longs but consumers are still able to purchase at the low $60s, sources said.
• "With spreads continuing to widen to $5 to $6 per month for the coming months, there is no pressure on the longs to sell at levels which are still close to the lows for the past years. Whilst seasonal demand may push premiums up over the next couple of months, they remains vulnerable to spread movements combined with (additional) supply ex queues and diverted flows from Asia" - Raffemet Commodities.

NICKEL PREMIUMS DOWN IN SOUTHEAST ASIA AND UP IN US, STABLE ELSEWHERE

• The physical nickel market was more mixed this week - lower premiums in Southeast Asia contrasted with firmer rates in the US while Europe and China were mostly unchanged.
• Warrant premiums for full-plates in Singapore, Malaysia and South Korea dropped $10 at the top end to $10-30 in-warehouse due to shrinking demand for Russian material from China while the LME-SHFE arbitrage is negative - Russian brands in Southeast Asia have been regularly shipped to China to seek healthy premiums.
• "Overall, the nickel [full-plate] market in Southeast Asia is terrible as it's basically Chinese-demand-driven but now people are losing interest due to the arb" - trader in Singapore.
• The arbitrage window has been closed for more than a month.Even though it has improved in the past two weeks, imports would incur to a loss of more than 1,000 yuan per tonne on Tuesday.
• "It's a messy market [in Shanghai] - when the arb loss was 4,000-5,000 yuan per tonne a few weeks ago, people offered $140 [premiums] and deals were heard done at $80; now when the arb loss has narrowed to 1,000 yuan, they still offer $140. I haven't heard that any deals were concluded" - local trader.
• Shanghai full-plate cathode premiums held at $80-100 for SHFE-deliverable and $70-90 for SHFE-non-deliverable material on a CIF and a bonded-warehouse basis, with pockets of buying interest emerging this week.
• A few of the larger trading houses are taking advantage of the recent dip to pick up some bargains in the hope the arbitrage window will open while most metal holders are sticking to their guns above $100.
• In Europe, rates were stable - plants are still well covered there is no fresh need for material. Full-plate premiums were steady at $60-80 in-warehouse Rotterdam.
• "I thought we would get more enquiries in September when many plants restart... but that's not the case" - European trader.

LEAD RATES EDGE HIGHER IN INDIA, STABLE ELSEWHERE

• Lead premiums remained unchanged except in India where lower imports of secondary supply from South Korea lifted rates for 99.97-percent purity to $55-75 per tonne CIF from $45-65 previously, sources said.
• While Iranian supply was still on offer at the bottom of this range, South Korean material increased in value following production cuts at a few secondary smelters in the country amid alleged dumping of waste, local sources told FastMarkets. The production volumes affected are unknown.
• In Europe, premiums in Rotterdam held at $60-70 per tonne duty-paid FCA for 99.97-percent-purity material.

TIN MARKET DIVERGES IN SINGAPORE, RISING PRICES KEEP BUYERS ON SIDELINES

• Traders are struggling to find buyers for tin amid lacklustre demand and rising prices - three-month LME tin peaked at $19,670 per tonne on Tuesday. With stocks at multi-month lows, the backwardation in benchmark cash/threes spread has ballooned out to $250 per tonne from $10 back last Tuesday.
• "Producers are now extremely happy due to the rising prices but end-users, who used to buy the metal at $13,000, $14,000 or even $15,000, just walked away and it's horrible for traders" -trader in Singapore.
• Overall demand, which was already soft, may have weakened further. Most customers have moved to the sidelines in the hope of lower prices in future.
• "End-users only buy the amount they have to and they don't want to have any stock - not at all… the word 'restock' has totally disappeared in tin end-users' world" - trader in China.
• Market participants were divided over headline premium numbers for 99.9-percent-purity tin in Singapore warehouses depending on brands, whether the metal is stored in LME-listed or non-listed warehouses, other terms and so on.
• Singapore 99.9 percent premiums for LME-registered brands widened to $50-100 per tonne from $50-80 last week, with delisted RBT material at the bottom end and other brands such as Bangka on offer even above the top end. By contrast, non-LME registered material traded at $0-50.
• "It’s a confusing issue - whatever the number is, it's all about negotiations" - a trader in Thailand.
• Premiums for 99.9 percent purity tin in Rotterdam warehouses held at $350-400 per tonne over LME cash prices.

(Editing by Mark Shaw)