A cross-border trading strategy that takes advantage of regional copper price differences is further obscuring the red metal's demand outlook.
The per-ton price for copper on the Shanghai Futures Exchange was recently about $60 more than a similar price on the London Metal Exchange, the main global hub for base metals. A difference this big means it is cheaper for traders to buy copper on the LME, which allows contract holders to take delivery of the actual metal in Asia, and ship it to China than to buy in Shanghai.
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A worker in China adjusts rings of copper at a factory in May.
Analysts say it is the reopening of this so-called arbitrage window between Europe and Asia that may be contributing to the drop in copper inventories in warehouses certified for delivery by the LME. On Wednesday, these stockpiles dropped for the 24th day in a row, to 417,625 metric tons. That is a decline of about 17% since the beginning of the year.
But it isn't clear whether that copper is making its way to end users who fabricate the metal into useful products like wires and pipes.
Copper prices had fallen 23% from their April highs but have since made tentative moves higher. The contract for July delivery on Tuesday gained 8.95 cents, or 3%, to $3.0870 a pound on the Comex division of the New York Mercantile Exchange.
Worries about China moving to cool its property sector, which may damp demand for copper construction materials, have been combining with broader fears about a global slowdown to weigh on prices.
"Demand for copper is much better than the market's been giving it credit for," said Bill O'Neill, a principal with Logic Advisors in Upper Saddle River, N.J.
While headline figures out of China, the world's largest copper consumer, on Wednesday pointed to a sharp decline in imports during June, the country's cable and wire makers boosted production rates because of a revival in power-grid investment. In addition, the June import data doesn't take into account the arbitrage trade, which restarted in earnest this month.
What is broadly underpinning the market are expectations of increasing global demand and a constrained supply response, said Jesus Villegas, an analyst at Texas-based aluminum consultancy Harbor Intelligence.
Freeport-McMoRan Copper & Gold Inc., the world's second-largest copper producer, said Wednesday that it sold 914 million pounds of copper in the second quarter. While this is more than executives estimated in April, it is less than the 1.1 billion pounds sold during the same period in 2009.
"The physical [copper] markets are stronger than the economic indicators in the United States," said Freeport-McMoRan Chief Executive Richard Adkerson, noting the declines in warehouse inventories. "We see our order books filling more strongly than we have in some time."
In other commodity markets:
CRUDE OIL: Futures ended lower, pushed down by U.S. data showing an unexpected increase in U.S. oil inventories and by comments from Federal Reserve Chairman Ben Bernanke suggesting a weaker economic outlook. Light, sweet crude oil for September delivery settled $1.02, or 1.3%, lower at $76.56 a barrel on the New York Mercantile Exchange.
SUGAR: World raw-sugar prices rose on continuing problems with Brazil's ports, which have slowed loadings of the sweetener because of rains. Nearby sugar for October delivery settled 0.19 cent, or 1%, higher at 17.47 cents a pound on ICE Futures U.S.
—Yue Li contributed to this article.
Write to Matt Whittaker at matt.whittaker@dowjones.com
