Copper slipped around 2 per cent on Wednesday as a weak consumption outlook prompted investors to take profits after an impressive rally that sent the metal to its highest in more than four months.
A fall of 1,750 tonnes in copper inventories could offer some support for prices, but with no sign of improvement in demand as global growth sags, any possible rally is seen short-lived, analysts say.
Copper for three-months delivery on the London Metal Exchange fell to $3,923 (U.S.) a tonne by 1035 GMT, versus $3,975 a tonne on Tuesday, when it neared its four-month high of $4,135 struck earlier this week.
“Imagine you bought metals several days ago and you're sitting on nice profits...You would be very tempted to take profits,” said Jesper Dannesboe, senior commodity strategist at Societe Generale.
“Especially when you consider the fundamentals are not supportive of much higher commodity prices just yet.”
Continuous drawdowns in copper inventories and buying by the State Reserves Bureau (SRB) of China, the world's top consumer of the metal, boosted copper prices more than 20 per cent in March alone.
The inventory drawdown and a rapid rise in cancelled warrants – material earmarked for delivery – lost its pace, withering previous hopes of an improvement in demand.
“If those purchases (by SRB) are a function of end user demand than it could be bullish but it doesn't look like there has been a dramatic increase in demand recently. So it seems a bit premature to expect prices to go any higher,” Mr. Dannesboe said.
Copper inventories in London fell to 503,675 tonnes, with cancelled warrants slipping slightly to 22,425 tonnes from 22,675 tonnes on Tuesday.
Aluminum also staged a breathless rally over the past couple of weeks, when it rose to its highest in two months, having gained more than 10 per cent in March.
Analysts believe the climb was purely driven by short-covering and lacked fundamental dynamics, while purchases by Chinese government have also underpinned prices.
China's SRB has bought 590,000 tonnes of aluminum at above-market prices to prevent forced plant closures and preserve jobs, prompting other provinces to do the same.
Central China's Henan province, the country's largest aluminum-producing region, will buy 500,000 tonnes of aluminum for a provincial reserve, But China's move triggered prompted some aluminum smelters to re-accelerate production – a move analysts say would have negative consequences for the industry.
“The government intervention in the markets has led to a dislocation betwen price signals and supply and demand dynamics,” said analyst Gayle Berry at Barclays Capital.
“As a result smelters are increasing output at a time when they should be cutting back because the demand is so terrible. Ultimately it is very bad news for the long term health of the industry,” she said.
LME-registered inventory fell on Wednesday by 3,000 tonnes but still stands at 3.45 million tonnes, near its record highs while the rise year-to-date is at around 1.13 million tonnes.
Three-months aluminum was at $1,404 a tonne from $1,412 a tonne on Tuesday while steel making ingredient nickel was at $9,550 from $9,750.
Battery material lead was at $1,260 from $1,284, zinc dropped to $1,260 a tonne from $1,275 and tin firmed to $10,150 from $10,025.
