Copper tracks oil higher, but mood cautious

LONDON - Copper prices rose on Thursday in a commodity-wide rally led by oil, but rising inventories and doubts about demand growth in top consumer China are expected to temper gains.

By (Reuters)

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Published: Thu 14 Aug 2008, 6:23 PM

Last updated: Sun 5 Apr 2015, 11:53 AM

Three-month copper on the London Metal Exchange was trading up at $7,490 a tonne at 0919 GMT compared with $7,400 a tonne at the close on Wednesday.

The benchmark metal used in power and construction hit a 6-month low of $7,150 a tonne on Tuesday as the commodity sell-off reached a frenzied peak.

However, profit-taking since then on short positions -- bets on lower prices -- and higher oil as supply concerns mounted after U.S. data showed large drawdowns on stocks, have buoyed sentiment.

"Industrial metals will continue to draw inspiration in the short term from movements in the oil price," said John Kemp, economist at RBS Sempra.

"A lot of commodity markets got themselves very short, but there's been a bit of a shift in sentiment, people are thinking prices had bottomed, at least in the short term."

In the medium to longer term however, markets are watching industrial activity in China, where data showed factory output growth slowed to 14.7 percent in July, a 19-month low, as manufacturers struggled with weakening export demand.

That compares with a consensus of 15.9 percent and a figure of 16 percent in June.

Industrial production data is a strong indicator of metals demand and one of China's biggest export market is the United States, where a housing market slump has hit copper demand, analysts say.


Negatives for copper include stocks in LME warehouses, which are at 6-month highs around 153,000 tonnes, a gain of about 40 percent since early May.

Another dampener is the falling backwardation or premium for cash material over the three-month contract, which is at around $40 a tonne from around $240 a tonne in mid-July.

Three-month copper meanwhile is down about 16 percent since a record high of $8,940 a tonne hit on July 2.

"A cyclical downturn in demand will ease the situation," Standard Chartered said in a note.

"But long-term secular demand growth from industrialisation and rising incomes in Asia, and particularly China and India, are still dominant trends."

That is particularly true for China, which consumes about 25 percent of total global annual copper production estimated at more than 18 million tonnes. But Chinese consumers have been absent from the market for some months now.

"The Olympics mean activity has stalled in China," a London-based trader said.

But he added that the narrowing gap between copper prices in London and Shanghai could persaude Chinese consumers to return as activity in the fourth quarter picks up.

Aluminium gained to $2,827 a tonne from $2,813 on Wednesday. The metal used in packaging, transport and construction was boosted by the higher oil price, but the likelihood of an oversupplied market could mean lower prices are on the cards.

Tin jumped more than 5 percent to $18,800 a tonne on a short-covering rally and was last at $18,275 from $17,800, nickel at $19,250 from $19,500 and lead at $1,725 from $1,684 at the close on Wednesday.

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