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Copper up but weak demand outlook caps upside

LONDON - Copper moved higher in erratic trade on Wednesday, taking its cue from the currency markets and rising oil, but analysts said the upside was limited due to lack of demand from China, the top consumer of the metal.

Nickel prices extended their gains, after rising more than 7 percent in the previous session as supply side news signalling possible tightness ahead offset soft stainless steel demand.

Copper for three-months delivery MCU3 on the London Metal Exchange was at $7,685/7,695 per tonne by 1354 GMT versus Tuesday's $7,575 per tonne.

"Metals like copper and aluminium are continuing to follow the currency markets," said analyst Leon Westgate at Standard Bank.

The euro was around 1.4754 against the dollar versus an earlier 1.4715 while the dollar index trimmed its gains of 0.5 percent to 0.1 percent. A weak dollar makes metal prices cheaper for local currency holders.

Industrial metals prices have tended to follow currency markets and wider macroeconomic developments recently as the slowdown in the global economy hits demand for metals.

Oil prices rose ahead of U.S. data, which was likely to show a drop in gasoline inventories and as Wall Street heavyweight Goldman Sachs reiterated its view of strong fundamentals.

Holding off

However, analysts see chances of a long-term rally rather slim as demand from China, where the market looked as if it would make up for the loss of the United States, is still weak.

"The Chinese are holding off buying -- they don't think the LME (London Metal Exchange) price will pick up until the fourth quarter so there is no real rush for them to buy," Max Layton, analyst at Macquarie Bank, said.

"In the fourth quarter we think the Chinese will increase their imports, back up to maybe 100,000-120,000 tonnes per month," he added.

Analyst Marc Elliott at Fairfax said prices were supported by speculation China could up imports after the summer slowdown.

"Material is reported to be moving to Asian warehouses in anticipation," he said in a research note.

LME aluminium edged up $3 to $2,780/2,790 a tonne.

Stocks in LME warehouses rose by 25,050 tonnes, with 20,600 delivered into warehouses in Detroit indicating a softening of demand from the automotive sector, to around 1.2 million.

So far this year LME stocks are up 24 percent.

Daily average primary aluminium output in July fell to 70,000 tonnes compared with 70,400 in June, data from the International Aluminium Institute (IAI) show.

Nickel, a key ingredient in stainless steel, rallied 7.3 percent on Tuesday as supply fears triggered short-covering. It was at $19,605 a tonne versus $19,395.

Swiss-based miner Xstrata Plc said on Tuesday it was suspending operations at its Falcondo ferronickel mining operation in the Dominican Republic, as a result of market conditions.

This year nickel is down around 28 percent. Macquarie Bank says nickel output losses of over 70,000 tonnes have been largely offset by slowing stainless steel demand.

Lead, mainly used in batteries, traded at $1,800/1,825 against Tuesday's close of $1,800. The global lead market was in surplus by 41,000 tonnes in the first six months of 2008, the International Lead and Zinc Study Group's (ILZSG) said.

The global zinc market was in surplus by 72,000 tonnes in the first six months of 2008. Zinc fell $26 to $1,720/1,740.

Tin was at $19,975/20,000 against the last quote of $19,750/19,780 on Tuesday. The backwardation was at $140 per tonne, compared to around $100 last week.

Yunnan Tin, China's top producer of the metal, will cut production by about 3,000 tonnes in July-August due to repairs, a company director said. The firm plans to produce 60,000-70,000 tonnes of refined tin this year.