(Minews) - Copper was under pressure on Thursday as investors and physical buyers continued to shun the industrial metal and stockpiles on the London Metal Exchange rose.
The red metal has failed to rebound strongly from the violent sell-off that was triggered by aggressive selling by Chinese-based speculators and a London hedge fund, rumoured to be Moore Capital.
While the price has nudged up from a five-and-a-half year low of $5,353 a tonne, it remains well below $6,000 a tonne — a level it had previously held since October 2009. The metal is down 10 per cent in the year to date.
On Thursday, copper for delivery in three months on the LME fell $68.50, or 1.7 per cent, to $5,668 a tonne.
Analysts said investors and industrial consumers were sitting on their hands and waiting for prices to full further before buying. In addition data from the LME showed copper inventories rising by almost 6,000 tonnes to just over 225,000 tonnes, taking this month’s increase to 27 per cent.
However, most of the analytical community believes the sudden drop (and previous drift downwards) cannot be justified by the metal’s fundamentals.
“In a world fixated by excess supply, copper stands out as the one commodity which should hold up against the malaise that has enveloped commodities”, said analysts at ANZ in a report.
There are various theories as to why the price has not recovered from last week’s slump. In March, when a Chinese hedge fund attacked copper, the price quickly recovered its poise.
One explanation is that the country’s housing market is weak and Chinese buyers did not buy as much copper on long-term contracts at the beginning of this year. The physical market is also seasonally quieter before the Chinese new year holiday in February.
The price of copper is still above the marginal cost of production, estimated to be about $5,500 a tonne.
Reports on Thursday also claimed that investment by the Chinese State Grid will only rise 9 per cent this year, not 24 per cent as previously expected.
Earlier this week, analysts at Goldman Sachs said spending by State Grid would not be enough to lift copper into a deficit this year since grid investment is only about 15 per cent of China’s copper demand, much lower than commonly thought.
A high proportion of grid expenditure goes toward ultra-high voltage power cables linking power stations in western China with the populous cities on the East. These are made of aluminium rather than copper, the bank said. China accounts for about 45 per cent of global copper consumption.
Demand was also thought to be weakened by a clampdown on the use of metal as collateral to obtain financing, after an alleged fraud was discovered in the port of Qingdao in May.
Banks, both Chinese and western, have been hit with millions of dollars of losses since metal in Qingdao and another Chinese port Penglai were alleged to have been pledged multiple times as collateral.
“All of us are trying to estimate real, physical, industrial demand but its hard,” one said. “It’s possible some of the financial demand was getting counted as real consumption for years.”
This issue was highlighted last summer in the nickel market, when metal most people thought had been consumed flooded out of China into LME-approved warehouses after banks imposed tighter credit restrictions in the wake of Qingdao scandal.
