Copper rallies with supply in spotlight

Copper rallied on Tuesday with supply issues back in focus, given a sharp drop in top producer Chile's July output and a prospective strike at a major Indonesian copper mine, but poor consumer confidence figures checked gains. Three-month copper on the London Metal Exchange closed up one percent at $9,160 per tonne from $9,075 at the close on Friday. The exchange was closed for a public holiday on Monday.
The metal earlier hit $9,225 its highest since August 5, after a report showed Chilean copper output fell by 18 percent in July on the year. Traders said short-covering also helped. "When people talk about metals being affected by supply side constraints, what they really mean is copper. I would argue that is the main explanation of why the copper price has been so much stronger than the other metals, over not just the short term but over the last five years," analyst Stephen Briggs of BNP Paribas said.
Chile, which provides around a third of the world's copper, produced 373,498 tonnes of the metal in July, down 18 percent from the same month last year, and down more than 50,000 tonnes from June. A market deficit of 343,150 tonnes is expected this year, according to median Reuters poll of 24 analysts.
Supply was also in focus as workers at Freeport-McMoRan Copper & Gold's Grasberg mine in Indonesia plan to stage a strike in coming days after talks with the company failed to resolve a pay dispute. Concerns over copper supply had eased in recent weeks, eclipsed by demand worries given a looming global economic slump and stubbornly high copper stockpiles that signalled tepid demand China as well as the West - even in the traditionally stronger third quarter.
Traders said that Chile's supply kink had in part been priced in, and copper's gains reflected new shorts forced to cover. US money managers showed some signs of doubt in the copper market, switching to a net short position in COMEX copper in the industrial metal for the first time since October 2009, data showed on Friday. "This week, metal prices are likely to be driven essentially by macro indicators: especially the ISM index and the labour market report in the US and the purchasing managers' index in China," Commerzbank said in a note. August's commodity sell-off, that saw copper tumble more than 12 percent, coincided with an increase in Spanish and Italian bond yields which undermined confidence in European bank balance sheets and pressured liquidity, causing liquidation across asset classes, said Credit Suisse Private Banking in a note.
"Once funding pressures abate...commodity prices could rebound despite lower economic growth...We would highlight momentum-based strategies as particularly attractive," it said. Copper trade flow sat around half the usual levels with just over 13,100 lots of the three-month contract traded on LME electronic platforms. Lead ended $2,558 from $2,485, showing gains of nearly 3 percent. It was aided by technical buying, as the metal pushed through chart resistance at the 100- and 200-day moving averages, sending buy signals to momentum-based traders. Three-month aluminium closed $2,425 from $2,378 on Friday. Tin finished at $24,000 from $23,805, nickel closed at $21,950 from $21,450 and zinc finished at $2,285 from $2,246.