Copper may take more hits as China demand falls

A weaker dollar helped buoy copper prices yesterday, but analysts say further losses are expected as the market acknowledges that recent gains have been built on the quicksand of Chinese demand.

Copper used in power and construction is down nearly 10 per cent since hitting an eight-month high of $5,388 (Dh19,790) a tonne earlier this month. Gains were based on Chinese buying for stockpiles, which is showing signs of having ended.

Three-month copper on the London Metal Exchange was trading at $4,922 a tonne at 1012 GMT compared with $4,805 at the close on Tuesday. Wednesday's gains were triggered by dollar weakness, which makes commodities priced in the US currency cheaper for holders of other currencies, ahead of a policy statement from the US Federal Reserve.

"The dollar is helping industrial metals today," said Barbara Lambrecht, analyst at Commerzbank. "We stick to our view that we will see a further correction for copper prices because Chinese buying is coming to an end."

Some analysts think China's State Reserves Bureau could in fact be selling copper back into the domestic market. China is the world's largest consumer of copper, accounting for about 30 per cent of total demand.

News that a rebound in Japanese exports slowed in May as shipments to China deteriorated and US demand remained weak also added to the gloomy outlook.

"Concerns about the global economy have resurfaced and this has hit base metals hard," Barclays Capital said in a note.

However, supporting copper prices were some expectations that the copper market surplus this year may not be as high as previously expected. That is reinforced by falling stocks.

Stocks of copper in LME warehouses at seven-month lows of about 275,000 tonnes compare with levels of about 500,000 tonnes earlier this month. Much of the difference has made its way to Chinese state reserves and consumer stockpiles.

Analysts say buying by China's SRB for the country's stockpiles is also a phenomenon in the aluminium market. Material heading towards China is reflected in the cancelled warrants or material already earmarked for delivery, which jumped to above 158,000 tonnes on Tuesday from near 100,000 tonnes on Monday.

"Strategic buying by the SRB in China is supporting aluminium prices as are higher energy costs," said Commerzbank's Lambrecht.

Power is estimated to account for about one-third of aluminium smelting costs.

Also helping to shore up aluminium are worries about a nearby shortage as many companies with metal are using it as collateral to release cash tied up in stocks.

"As much as 75 per cent of total stocks are tied up in financing deals," Calyon, corporate and investment banking arm of Crédit Agricole group, said in a note. But in the longer term, the overhang of stocks– near record levels above 4.35 million tonnes – will dampen sentiment as will doubts about demand from the transport and packaging industries.

Aluminium was at $1,630 a tonne from $1,605, zinc was at $1,575 from $1,519, lead was at $1,662 from $1,620, tin at $14,700 from $14,550 and nickel at $15,200 from $14,610.

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