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Copper slips on weak euro, China demand concerns

LONDON - Copper slipped on Wednesday after a contraction in the manufacturing sectors in Europe and China raised fresh concerns about economic slowdown and prospects for demand, and as the euro fell.

Benchmark copper on the London Metal Exchange (LME) was untraded in official rings, but bid at $8,328 a tonne, from Tuesday’s close of $8,400.

The euro fell against the dollar after data showed the euro zone manufacturing sector slipped further into decline last month as a downturn that started in the periphery appears to be taking root among core members France and Germany.

A stronger dollar puts pressure on metals prices as it makes commodities priced in the U.S. unit more expensive for holders of other currencies.

“There is a lull at the moment, with markets searching for direction, and a lot of the moves are likely to be mainly a function of currency movements,” Capital Economics commodities economist Ross Strachan said.

China’s manufacturing sector shrank for the sixth month running in April, according to a private-sector survey that showed a continued divergence between China’s larger, predominantly state-owned enterprises and smaller, private firms.

The metal, used in power and construction, gained about 11 percent in the first quarter but failed to register monthly gains in March and April due to concerns about weaker demand from China, which consumed about 40 percent of the global supply last year.

“The major concern is end-use demand. We have seen a surge in imports (to China) a few months ago, and that has gone almost entirely into stock in China. With the arbitrage being closed, imports are likely to be much weaker over the next few months,” Strachan said.

“They will still continue to receive some of the contracted material, but the fact that they’re talking about exports is a clear indication of weakness in real demand.”

With the arbitrage window between LME and Shanghai copper staying firmly shut, and the LME premium at nearly $500 per tonne over Shanghai, “there’s zero appetite out of China at the moment to buy LME copper and the shorts just continue to pressure it”, a Singapore-based trader said.

BACKWARDATION EASES

The latest data from the LME showed a 2,600 tonne outflow of copper from warehouses monitored by the exchange, with the ratio of cancelled warrants - the metal earmarked for delivery - to total stocks at 33.7 percent.

The premium of LME cash copper over three-months material fell to $65 on Wednesday after shooting up to $149 a tonne on Monday, the biggest since early August 2008. The drop indicates less tightness in immediate supply.

Some market players said they expect the LME cash-to-three-months backwardation to continue easing after large Chinese copper smelters announced they would deliver copper into LME warehouses.

“A lot of these big Chinese producers were among those caught in the current squeeze, and since they have so much metal, delivery into LME warehouses is more cost-effective to them. The only thing that can hold them back would be the amount they can export under their state-assigned licences,” said a Shanghai-based trader.

“You can’t expect them to take this squeeze situation lying down. They are bound to come up with countermeasures. Given the clout of the parties involved, it’s exciting times ahead,” he added.

China’s Minmetals Resources said on Wednesday its 60,000 tonne-per-year copper mine in Democratic Republic of Congo would fall short of production targets due to power disruptions.

Aluminium traded at $2,107 in official rings from Tuesday’s close of $2,123 a tonne, while zinc, used to galvanize steel, was at $2,035 from Tuesday’s close of $2,053. Battery material lead traded at $2,149 from $2,180.

Tin was at $22,325 from $22,550 while nickel was at $17,475 from $17,700.