London 13/09/2016 - Physical markets stepped further out of the summer lull this week, with activity picking up thanks to some relatively improved arbitrage opportunities into China for copper and zinc and the start of some discussions for long-term contracts across the complex.
The premium for copper in China in particular climbed to its highest in five months due primarily to a small opening in the import arbitrage between the LME and the SHFE.
Still, while activity is picking up across the complex, some of the world's most important consumers are grappling with several fundamental challenges.
"I think generally there's been a bit more interest over the last week or so - we've seen a bit more in copper and the others too but they're still struggling for now," one warrant trader said.
Aluminium in particular has this week fallen to multi-year lows in the US and Japan - in the latter, negotiations for fourth-quarter supply have seen the lowest recorded deal in seven years at $75 per tonne.
Similarly, in the nickel market, where uncertainty surrounding one of the most premium brands status' as listed metal on the SHFE and the LME means that fresh buyers are increasingly difficult to find.
Zinc and lead were a little more muted as was tin market despite the past week's run on Tom/next spreads - weak fundamental demand means that holders of metal are still prepared to undercut competition with more attractive rates.
The Chinese and Taiwanese markets will be closed on Thursday and Friday for seasonal holidays as will the Korean market from Wednesday to Friday.
ALI PREMIUMS HIT 7-YR LOW IN US, JAPAN WHILE EUROPE STEADIES
- Aluminium premiums took another beating in the US and in Japan this week, sliding to seven-year lows due to a lack of buying and ample supply, while Europe paused to watch the spreads.
- The US Midwest premium fell to 5.25-5.9 cents per pound from 5.75-6.25 cents - consumers are unwilling to buy while prices are buckling and import volumes are high.
- "It's a falling market and everyone is on the sidelines. No one is going to make a move until after the American Extruders Council and Metal Bulletin conferences" - US trader.
- The US was also under pressure from falling premiums in Japan - this means the US remains the preferred export market for Middle Eastern and Russian producers.
- If the handful of deals that have already been booked for the fourth-quarter ingot supply to major Japanese ports (MJP) at a premium of $75 per tonne over LME cash prices are confirmed as the quarterly benchmark, it would mark a seven-year low.
- At least one trader and a large Japanese end-user reportedly booked volumes at that level; others are still bidding closer to $70.
- In the rest of Asia, premiums held at depressed levels. Spot transactions are thinning out while confirmation of the MJP settlement is awaited and ahead of the MB conference in Madrid at the end of the month. South Korean premiums were unchanged at $55-65 on a cost, insurance and freight (CIF) basis, for instance.
- In Europe, premiums edged $5 higher in Rotterdam to $115-125 per tonne duty-paid in-warehouse and $65-75 duty-unpaid. This is mainly because the contango at $5-6 per month is wide enough to support cash-and-carry trades.
- But the tightness in the very nearby spreads is being closely watched and could halt the uptrend if it worsens. 'Tom'/Next and cash/Sept were both at $0.50 backwardation on Tuesday.
- Annual contract talks have begun, with a few bookings reported in Europe for 2017 at premiums slightly above spot levels. But very little will be booked until the Madrid conference and Washington AEC meeting.
SHANGHAI COPPER RISES FURTHER TO 5-MTH HIGH; STEADY ELSEWHERE
- Copper premiums in Shanghai reached their highest since early April this year due to improved arbitrage opportunities. Rates in Europe and US were steady.
- Spot premiums in Shanghai were quoted at $50-60 per tonne CIF and in bonded warehouses, up $5 from last week.
- "We heard more enquiries … I have sold all my stocks because we are worried about the sustainability of the current arbitrage" - trader in Shanghai.
- The LME-SHFE physical arbitrage window has been fluctuating between open and closed over the past week. As of Tuesday, imports incurred a loss of around 200 yuan ($30) per tonne - small enough to get financiers involved, Chinese sources claimed.
- "The recent improvement in the arb is more related to the exchange rate than the real differential between LME and SHFE prices - the yuan has appreciated during the G20 [meeting]" - local trader.
- But LME prices would need to drop below $4,000 to make the arbitrage more attractive from here, a trader in Europe who is active in Asia countered.
- The unpredictable exchange rate change, tepid domestic demand and ample domestic supply make it unlikely that the arb window will remain open, which will probably result in lower premiums again, according to consensus.
- Spot premiums in Taiwan also climbed $5 to $50-60 per tonne CIF in line with Chinese market while in-warehouse premiums were unchanged at $0-5 per tonne in Singapore and Malaysia.
- Market participants in Asia are watching for any impact from the bankruptcy of Hanjin, the seventh-biggest shipping company in the world, on copper shipments and regional premiums. No meaningful change has been identified so far.
- Premiums in Europe were stable at $45-50 CIF in Rotterdam and $55-65 CIF in Italy, with buyers slow to return to the market after the summer holidays.
- "Factories in Italy restarted at the beginning of this month but surprisingly they want to wait a bit more [to buy]" - second trader in Europe.
- The US Midwest delivered copper premium was steady at 5.25-5.75 cents per pound but sentiment has deteriorated over the past week.
- "The calendar might say September but it's really still August in terms of what business is like. You call up anyone in the market and the first thing they say is that business sucks. It doesn't surprise me that people are putting metal into the warehouses - there are just no buyers" - US trader.
- In the past week, 12,000 tonnes of copper have been delivered into LME-listed warehouses in New Orleans, which indicates that inventories are building up even in locations outside of Asia.
ZINC UPCHARGE RISES IN SHANGHAI, STABLE ELSEWHERE
- Premiums for zinc were slightly higher in Shanghai this week due to the improved arbitrage but rates held steady elsewhere.
- Special high-grade zinc in Shanghai climbed to $100-110 per tonne in-warehouse on the spot market, up $5 from last Tuesday, on better LME-SHFE arbitrage opportunities.
- "The arb has improved and people are quoting SMC brands at $115 bonded Shanghai" - trader in Asia.
- Offers from producers and some traders were reportedly at $115 for Australian brands but no concrete deals have been sealed.
- In Taiwan, premiums were stable at $115-125 per tonne amid talk that producers have lowered their offers to $120-125 from $130 previously.
- Premiums in Singapore were last at $100-115 per tonne FCA for low-lead metal, with fresh material quoted at the higher end of the range.
- In Europe, rates were last at $125-140 per tonne duty-paid Rotterdam. Spot enquiries could pick up if LME zinc prices were to drop below $2,200 per tonne, sources claimed.
- "Premiums are still holding firm but I guess the drop in zinc prices recently might see potential growth in buying interest" - zinc trader.
LEAD RATES STEADY
- Premiums for lead were unchanged - despite falling LME prices, interest has not improved.
- In India, rates were last at $55-75 for 99.97-percent-purity metal. Any rise from this level remains dependent on production cuts at South Korea's secondary lead smelters.
- In Europe, premiums in Rotterdam were unchanged at $60-70 per tonne duty-paid FCA for 99.97-percent-purity material.
NICKEL UNDER PRESSURE IN ASIA, BRIQUETTES SLIP $10/T IN EUROPE
- Nickel premiums remain under pressure in Asia and Europe, with the Chinese import arbitrage window firmly closed and with traders increasingly wary of taking Russian full-plate cathodes.
- Premiums for full plate warrants in Singapore, Malaysia and South Korea are at $10-30 per tonne, in line with last week but down considerably from June-July levels of $30-80.
- "I'm getting some cheap offers where it is clear that the trader is just trying to get rid" - source in Asia.
- In China, the arbitrage window remains firmly closed; the market there has been struggling with a lack of financing demand while the stainless steel industry is covered by long-term agreements, sources said.
- "Frankly speaking, there's not much demand at all - whenever I'm offering I get no bids back" - trader in Asia.
- In Europe, premiums for full-plate cathodes are also static at $60-80 per tonne but briquettes slipped $10 to $60-80 per tonne.
- Higher nickel prices in August have brought more stainless steel scrap to the market where previously supply was tight; consequently, stainless mills are unwilling to pay higher premiums for refined material.
- "The nickel price went above $10,000 so therefore for the stainless plants it's easier to source stainless scrap… so [nickel] premiums should be capped for the near term" - trader in Europe.
TIN PREMIUMS UNMOVED IN TUMULTOUS WEEK
- Tin premiums are unchanged despite a week of fluctuating LME prices and spreads.
- The cash-3 months spread soared to $250 per tonne but has since narrowed, reaching $34 per tonne in today's trading, with 400 tonnes put on warrant on Friday.
- News that exports from swing-producer Indonesia jumped 62 percent in August to 5,379 tonnes from the previous month has poured cold water on a market that had been heating up; formerly shuttered independent smelter RBT has also been revived there.
- Spot premiums in Singapore held at $50-100 per tonne in-warehouse for 99.9-percent-purity ingots.
- In Europe, while premiums are unchanged, upside pressure is stemming from the higher financing costs associated with higher tin prices.
- As well, some shipments of tin have been delayed due to the bankruptcy of Hanjin, sources claimed, although this has not yet triggered a surge in spot enquiries. Premiums remain at $350-400 per tonne for 99.9 percent purity tin in-warehouse Rotterdam. Low-lead is also stable at $450-500.
- "Prices are rising but we don't really see a lot of movement in the physical market. Tin premiums are pretty stable" - consumer in Europe.
(Editing by Mark Shaw)