Copper hits 4-month high on stocks falls, strong Chinese demand

Mon, Feb 18 2008, 15:49 GMT
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LONDON (Thomson Financial) - Copper surged to a 4-month high amid ongoing worries over sharp declines in LME inventories and as a rebound in demand from China, the world's largest user of the metal, boosted sentiment.

MF Global analyst Ed Meir said gains in copper could be sustained through the week as it is very light on the US macro economic calendar, meaning concerns over the economic decline there will remain sidelined.

US markets are closed today for the President's Day holiday, while the remainer of the week sees the release of January inflation data, as well as housing and building starts.

In any case, traders have pushed aside worries over US growth and falling copper demand there, to focus on fundamental factors like the ongoing decline in LME inventories.

The LME said in a daily report today that copper stocks held in its warehouses fell by 6,275 tonnes to total 144,375 tonnes. Stocks are now at their lowest since mid-October.

At 3.18 pm, LME copper for 3 month delivery was up at 7,930 usd a tonne against 7,730 usd at the close Friday, having earlier hit a 4-month peak of 7,965 tonnes.

Meir said LME copper stocks are being eroded because of a ramp up in Chinese copper imports, which were up 6 pct in January from December to 239,000 tonnes.

Although the increase in imports has helped spark a sharp build up in copper stocks in Shanghai, players are for now holding out for sustained strong demand from China, the world's largest copper consumer.

"China is still consuming and importing healthy amounts of copper," said UBS analyst Robin Bhar. "This shows China has an appetite for copper and that is always going to lend some support (to prices)."

Strong demand from China and falling LME inventories have underpinned copper and other metals in the year to date and helped overshadow worries that demand might wane if the US economy slows further.

Elsewhere, aluminium was up at 2,824 usd a tonne against 2,820 usd at the close Friday, when the metal hit a 9-month high of 2,873 usd amid ongoing jitters over possible supply outages in South Africa.

The country, which is the eighth largest aluminium producer in the world, is currently in the grips of a power crisis that last month led to a complete shutdown of mine output for 5 days.

Although state utility Eskom is currently reviewing plans to buy 45 mln tonnes of coal, in a bid to stave off the crisis, there is growing doubt over the efficacy of the move.

"Eskom is reluctant to purchase the coal at the spot export price, which is three to four times higher its average purchase price, and is in talks to pay somewhere in between the two levels".

"Meanwhile, the company is still weighing up various options and has still not ruled out the possibility of power buy-backs from major industrial and mining companies," said Standard Bank analyst Leon Westgate.

Last week, reports that Eskom was considering a complete buy-back of power from three aluminium smelters in South Africa and Mozambique sparked a sharp price rally.

Up to 1.5 mln ounces of aluminium output could be lost this year if the smelters are shut down. As things stand, industrial users have been forced to cut power usage to 90 pct of normal needs.

Meanwhile over in China, some 650,000 tonnes of output might be lost this year as a result of reduced output in recent weeks, linked to power shortages sparked by severe winter storms.

Although supply from China is starting to recover, the outlook in South Africa is not nearly as bright, with Eskom itself admitting the power shortages will be in place until 2012.

In other metals, lead was up at 3,007 usd against 2,970 usd, supported by a 275 tonne decline in LME inventories, while tin rose to 17,050 usd a tonne from 16,850 usd amid a 185 tonne drop in inventories held by the LME.

Gains in zinc, on the other hand, were capped by a further 575 tonne increase in LME inventories that kept stocks at their highest points since October 2006.

Three month zinc was flat at 2,360 usd a tonne, while nickel bucked the rising trend in metals, falling to 27,501 usd against 27,625 usd amid an increase of 216 tonnes in LME inventories.

maytaal.angel@thomson.com

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