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Arbitrage Advantage Between London & Shanghai Exchanges Emerging

Author: Dilip Kumar Nath/Wednesday, November 25, 2020/Categories: Exclusive

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Arbitrage Advantage Between London & Shanghai Exchanges Emerging

In October, we saw buying opportunities emerged from lower levels in base metals as robust demand from top consumer China, expectations of stronger growth and demand in the rest of the world and a lower dollar helped create buying momentum. However, the market reacted on news of reposition of lockdown in many countries after resurgence of Covid-19 in US and Europe, some slowdown in economic releases, doubt on further stimulus by US and many more.

The most stable metal of this counter reached a 28-month high at $6,901.50/mt on October 22 on LME. The price has lost support since, potentially due to surging global coronavirus infections and stalled US stimulus negotiations. However, the LME price moved up 1.2 per cent and gain 0.9 per cent in MCX. Structural underinvestment, policy-driven demand and macro tailwinds from a weakening dollar and rising inflation risk may create a bullish outlook. It has been estimated that Biden win would increase US copper demand by two per cent over the next five years. Chinese customs officials informally warned Chinese importers that Australian goods, including copper concentrate, will be targeted for extensive inspections until the diplomatic row between both countries is solved. China’s copper imports rose year-on- year in October, official data showed, and set a new annual peak with two months to spare, underscoring the speed of the recovery from the coronavirus in the world’s top consumer of the metal. Arrivals of unwrought copper and copper products stood at 618,108 tonnes last month, the General Administration of Customs said. That was down 14.4 per cent from 722,450 tonnes in September, which was the second-highest monthly level on record, but up 43.4 per cent from 431,000 tonnes a year earlier. Imports in January-October reached 5.61 million tonnes, up 41.4 per cent year-on-year (y-o-y) and beating the previous record for China’s annual purchases of 5.297 million tonnes in 2018 with two months still to go. Imports have surged this year as China’s rapid recovery from the coronavirus outbreak opened up an arbitrage between London and Shanghai copper prices that saw buyers snap up cheaper overseas metal.

Copper futures at the MCX platform has settled lower at Rs526.40/kg on the previous week. Since last couple of weeks prices are trading higher from Rs494.80 levels to Rs549.05 and the prices are already taken the correction from Rs549.05 to Rs494.80, which was the Fibonacci retracement of 23.6 per cent exactly and now prices has been bounced from Rs494.80 to Rs528 and well sustained above the trend line resistance of Rs528 respectively.

Now, the immediate resistance is seen at Rs536 then 549. If the price will sustain above the immediate next resistance line of 536 it will continue to move upside towards the next resistance line of 549 and break above it will see further upside towards 555/560 very soon. If the price sustain below the support line of 523 can see the down side move towards 520/515 levels in this week.

We saw more than 4% fall in lead prices in SHFE whereas it was only 0.6% LME. It gave some arbitrage opportunities between the two. MCX saw a rise of 2%. Lead, the demand for which comes significantly from the automotive sector, has not been supported of late. Latest data from the International Lead and Zinc Study Group (ILZSG) shows that the total lead production declined 3.1% YoY to 6.5mt, while consumption fell 5.4% YoY to 6.4mt from January 2020-July 2020. In the coming month, we expect lead futures to trade bullish due to weaker Dollar Index and better economic data in the US and China. China and other Asian countries usage, which had been lagging in the previous months, are also forecasted to higher in the months ahead.

Lead future at the MCX platform has settled flat at 149.60 on the previous week. At present prices are trading above the daily 18 EMA levels of 147.57.The Momentum Oscillator Stochastic (14,3,3) is now witnessing positive divergence and also providing bullish trend for short to medium term basis. The 50 days EMA sustained on the higher side which is indicate buying in short term basis. So overall the commodity is expected to move higher from its support level of 146. Now the crucial resistance is seen at 151, sustainable trade above this level will see the good upside move towards 155/160 in this month and if the prices has sustain below 146 levels then will see again the downside move towards 143/141 respectively.

In zinc, SHFE and LME, the two major exchanges noticed around 1.3% and 4.6 % respectively whereas MCX saw more than 7% upside. With some expectation of improvement in construction activities may continue to lend support to zinc prices.Expectations of a surge in government’s construction and infrastructure spending boosted the demand outlook for steel as well as zinc (used in galvanizing steel). Some smelters are worried about the ore supply in Q4 recently. Year-to-date zinc imports by China are down 25% on last year at 358,000 tonnes and lead totals only 21,000 tonnes, down 76% on 2019. Analysts agree that zinc supply has been hit hard by lockdowns in South American but China’s smelters seem to have weathered the storm. Imports of zinc concentrates rose 32% in the first nine months of 2020. Lead imports, meanwhile, fell 20%, but from a high base - imports last year were the highest since 2015.

Zinc future at the MCX platform has settled little lower at 201.80 on the previous week. From last couple of weeks, prices are trading higher from its low of 181.20 to 209.05. At present prices are trading above the daily 200EMA levels 191 and above the weekly rising trend line resistance levels of 200. The long term trend is bullish only and we have already seen the correction last week from 209.05 to 199.70, if it sustain below 199.70 levels will see the downside move towards 195/190 and if it trade above 209 can see further upside move again up to 215/220. But the view will be intact until the recent low 199.70 is not interrupted.

The writer is a senior research analyst (commodities), SMC Global Securities


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