Copper slipped on Monday as a strong U.S. dollar versus the euro prompted investors to cash in profits after a rally which pushed the metal to a six-month high last week.
Analysts were divided on whether the uptrend was intact, with some betting on a recovery from China, the top consumer of the metal, and falling stocks while some were still cautious on the demand outlook.
Copper for three-months delivery on the London Metal Exchange fell to $4,707.75 (U.S.) a tonne by 0912 GMT, versus Friday's close of $4,803 a tonne. The metal, a key input for the construction industry, rallied to a six-month high just below $5,000 a tonne last week.
But Robin Bhar, analyst at Calyon, said even though the stronger dollar was putting the metal under pressure, there was still scope for fresh gains.
“I think it is fair to test the upside again,” Mr. Bhar said. “The stocks (inventories) are falling...Buying from China is coming through mostly for stockpiling reasons. Everywhere else the demand's stagnant, if not falling. It's a China story.”
The euro fell against the dollar on uncertainties over the next policy steps the European Central Bank will take to stimulate the economy. A stronger dollar makes industrial metals more expensive for local currency holders.
Copper prices are up nearly 17 per cent this month, heading for the fourth straight month of gains, spurred by growing signs of a recovery in China, speculation of still-strong demand even after record imports and recent more upbeat U.S. economic data.
But the sustainability of Chinese buying and therefore the price rally is in question.
“Can that last? China always tends to be strongest in the first half (of the quarter) then tends to slow in May, June. It can be sustained for another month or so then I expect the economy to start slowing,” Mr. Bhar added.
Falling inventory levels, after months of piling up in late 2008, and cash copper moving into a premium – signalling tightness in the nearby market – also supported the prices, analysts said.
Premium – or backwardation – in cash copper versus the three month price was at $12 a tonne, inverting after six months of contango, or prompt discount.
“In the past two months, the Chinese imported lots of copper and it seems they couldn't get enough from the physical market so many domestic clients bought warrants from LME warehouses. That's the main reason why it changed from contango to backwardation,” said a Shanghai trader.
China's reserve-building plan targets purchases of 1 million tonnes of aluminum, 400,000 tonnes of copper and 400,000 tonnes of lead and zinc together over three years, according to a report Friday on a Web site controlled by the China Nonferrous Metals Industry Association.
“I think in the next one to 1-½ months, the Chinese will continue to buy warrants from LME warehouses but after that they will stop or slow down. So I think the market will remain tight.”
Copper inventories in LME warehouses fell by 7,300 tonnes to 462,325 tonnes, having dropped nearly 80,000 tonnes since mid-February. Cancelled warrants – stocks earmarked for delivery – rose to 68,325 tonnes from 64,400 tonnes on Friday.
Tin was again the only metal, bucking the trend as it slightly rose to $12,450 a tonne from Friday's close of $12,250. Dominant positions controlling more than 90 per cent of cash warrants on LME stocks and fund buying have bolstered prices.
Zinc fell to $1,515 from $1,557 on Friday, while lead was down at $1,510 from $1,555. Aluminum was at $1,470 from $1,486 and nickel at $12,500 a tonne from $12,850.
