SMM Daily Review - 2011/8/29 Base Metals

After opening higher at RMB 17,380/mt, most active SHFE 1111 aluminium contract outperformed surrounding base metals contracts and hit an intraday high of RMB 17,395/mt on August 29th. However, due to market concerns towards liquidity pressure caused by talks of a spread of base of reserve to include margin deposits, the contract quickly erased earlier gains to narrowly struggle at RMB 17,365/mt. Finally closed price was RMB 17370/mt, slightly up by RMB 5/mt or 0.03% from previous trading day. Positions of the contract fell by 2,080 lots due to profit-taking at the tail of trading. Transactions turned quiet during the day with only more than 20,000 lots reported with closed LME and strong resistance at RMB 17,400/mt given capital tightening expectations. SMM expects most active SHFE aluminium contract to stagnate at the 60-day moving average in the short term while gathering upward momentum.

Morning trading prices of spot aluminium in Shanghai were between RMB 17,760-17,790/mt, with premiums of positive RMB 140-170/mt over SHFE current-month aluminium prices. Spot aluminium prices fell as a result of drastic fluctuation in SHFE aluminium prices. Goods holders also actively lowered their quotes given weak consumption at the month’s end, with spot quotes in Wuxi falling the most to near RMB 17,700/mt. Market transactions were sparse. Spot quotes in the afternoon were between RMB 17,750-17,780/mt, with purchases rarely reported and only a few transactions seen near RMB 17,750/mt.

SMM aluminium ingot weekly average price during Aug. 22nd to Aug. 26th was RMB 17,788/mt, slightly down by RMB 17/mt or 0.1% from previous week.

A recent SMM survey shows 67% of market respondents are neutral towards aluminium prices during this week. Though upward momentum of aluminium prices is limited by weak macro economic outlook, seasonal low-demand as well as tight capital supply at month’s end, strong support can still be found from low inventories, power restrictions in summer and increased demand from China’s affordable housing project.

25% of market respondents are pessimistic towards aluminium prices during this week. Their view is based on continued cautious market sentiment due to US Fed’s delay of QE3 selection until September, remaining tight monetary policies during second half of 2011 as indicated by market rumors China’s central bank will include margin deposits into base of reserve, which will freeze another RMB 900 billion, higher selling interest among goods holders due to capital pressure during month’s end and increasing spot aluminium inventories.

Remaining 8% of respondents are optimistic towards aluminium prices during this week, as they believe a stop of falling at RMB 17,700/mt, limited supply and positive consumption expectations in September will boost goods holder confidence to struggle at RMB 17,800/mt.