Base Metals Weekly– Detailed Report

Monday, June 23, 2014

Market Commentary

Metal futures rose before the end of the week, with

copper set for their first weekly gain in four, backed by

tighter physical supply in China. China's copper imports are

likely to fall as an ongoing probe in Qingdao port into

alleged fraudulent use of the metal as collateral for loans

has prompted banks to be stricter in lending to trading

companies. Physical copper supply in China is tightening at

a time when demand is brisk, boosting premiums for the

metal in Shanghai. Supply shortage is supporting zinc, with

LME futures scaling 16-month high and heading for their

largest weekly increase this year. Dollar continues to be

under pressure, heading for its biggest weekly loss in over

two months, after the US Fed expressed confidence the US

economic recovery was on track.

Context

Copper prices closely follow the direction of China’s policy.

Prices were cheered up from recent moves by the central

government to fuel the economy. Previously, copper

markets were confused by developments in China, after a

criminal investigation, linked with copper consignment for

loans, had locked down a copper warehouse at the port of

Qingdao. Robust industrial growth, however, had cheered

markets up again afterwards.

Premium for physical copper in Shanghai surged to 580-

730 ($93-120) yuan per ton over the Shanghai front-month

futures at the end of the week from a small discount last

week, suggesting tight supplies. Copper imports are

depressed as banks are making it more difficult for trading

companies to secure letters of credit. The investigation

into whether a Chinese trader used the same batches of

metals multiple times to get bank loans risks undermining

Please refer to the disclaimer at the end of the report.

Copper- Weekly Market Data

Exchange

LME

Contract

Cash

Open

Cash

6812

6649

Change

6867.5

6820

% Change

47.5

178

Open Int.

0.70%

2.68%

Change

Pivot

Resistance

6851

6765

Support

6893

6885

MCX

Apr-14

Aug-13

402

415.45

14.6

3.64%

13612

-8982

411.3

420.6

Exchange

Open

Change

% Change

Open Int.

Change

Pivot

Resistance

Support

COMEX

3.056

3.1175

0.0885

2.92%

409

-183

3.09

3.14

3.07

Copper- Weekly Market Data

Shanghai

LME

Shanghai

Inventory

49190

163,700

81,929

49290

159,425

75,529

190

-4,275

6,400

0.39%

-2.6%

-7.8%

6950

106702

49667

50923

48033

LME 3 Month Forwards – Other Metals

Commodity

Nickel

Zinc

Lead

Aluminium

Open

18070

2083.5 2086.75

1843

18407

2176

2134

1887.75

Change

327

89.75

44.5

% Change

1.81%

4.30%

2.11%

2.41%

the attractiveness of offering credit to companies that pile

commodities inventory into bonded warehouses in China.

A Bloomberg survey indicated that, traders may sell about

250,000 tons of bonded copper in China through September as it

gets harder to secure financing amid the probe. Some copper

may be moved from China to LME warehouses in South Korea,

and possibly Singapore and Malaysia. The metal going into LME

depots won’t necessarily be sold onto the exchange as the

holders may retain ownership. They will attempt to attract

financing once again with a more reliable warrant receipt.

Concluding its 2-day meeting, the Fed announced its decision to

keep key Interest rate unchanged at 0.25%, while monthly assets

purchases were trimmed by $10bn for the fifth straight time.

Fed’s Chair Janet Yellen expressed the Committee’s views that

rates are likely to stay low “for a considerable time”. She

emphasized on labor market weaknesses and “noisy data”,

referring to improving CPI readings.

Fewer Americans filed applications for unemployment benefits,

Consumer confidence rose and manufacturing picked up. CPI for

May was recorded at 2.1% annual growth and 0.4% MoM, while

core CPI, which exclude food and energy, added 0.3% on a

monthly basis and 2.0% YoY. CPI is a leading indicator for

Consumer Spending, which generates about 80% of US GDP, and

is the primary gauge used by the Fed for its monetary policy

decisions. The annualized rate of housing starts dropped 6.5% on

a monthly basis in May and stand at 1.001 million, while building

permits annualized rate declined by 6.4% on a monthly basis to

0.991 million. The real estate sector accounts for about 13% of

US GDP.

Global zinc demand outpaced supply by 107,000 tons in January

to April, up sharply from a deficit of 17,000 tons in January-

March, data from ILZSG shows. Zinc stocks on LME warehouses

have been falling this year hitting 674,375 tons on Wednesday.

While lead stocks were similarly low, prices have not risen as

sharply. The difference appears to be that participants are still

engaged with zinc, while lead remains in the shadows with prices

remaining range bound. The resulting lack of volatility in lead is

in turn seeing participants look for metals with a more of a story

or with some technical momentum at least, with lead falling

even further out of favour.

LME Warehouse Stocks - continue to slide

800000

700000

600000

500000

400000

300000

200000

100000

Jan-13 Apr-13 Jul-13

Source: Reuters

Oct-13 Jan-14 Apr-14

Copper

Lead

1300000

1200000

1100000

1000000

900000

800000

700000

600000

Zinc

Please refer to the disclaimer at the end of the report.

It’s been a record-breaking week for nickel, albeit not the kind to

do much for this market’s punchy bull narrative. Tuesday saw the

warranting of 19,578 tons of metal into LME warehouses, largest

since March this year, taking the LME stocks of nickel to an all-

time high of 305,970 tons. It’s a useful reminder that markets do

not miraculously shift from surplus to deficit conditions at the

flick of a switch. While there is plenty of evidence that the global

nickel market is steadily tightening thanks to the Indonesian ban

on nickel ore exports, the process will be slowed by the legacy

stocks that have accumulated over the past few years.

Outlook

Last week, the dollar played led to the rally as dropped for a

second straight week. Combined copper stockpiles monitored by

exchanges in London, Shanghai and New York extended a drop

to the lowest since October 2008. In the week ahead, focus will

be on Chinese PMI numbers and New home sales data in the US.

The short term trend has become confusing as copper spurted

amidst mixed fundamentals, while nickel continues to slide on

hope of Indonesian tax respite. Zinc and Aluminiuim have

become unstoppable and continues to add gains and lead

continues to be inch up along with other minor metals.

Copper cracked below $6600 and recovered, and can expect

some more upside, but the overall trend continues to be weak.

We expect MCX prices to be in a range of 408-396.

For any details contact:

Commodities Advisory Desk - +91 22 3958 3600

commoditiesresearch@motilaloswal.com

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Please refer to the disclaimer at the end of the report.