Copper slips in holiday trade, but China outlook supports

SINGAPORE: London copper edged down on Monday as the Lunar New Year holiday in much of Asia drained liquidity from the market, but prices were underpinned by Chinese trade data last week that showed demand growth reviving in the world's top metals consumer.

Worries about the strength of the global economic recovery have dogged the outlook for metals, with the sector lagging far behind markets such as equities, where indices like the S&P 500 last week struck multi-year highs.

But as a fragile recovery sprouts in China's main export markets - Europe and the United States - sentiment is slowly turning more upbeat on copper.

"We've had quite a significant run up on copper - there is a measure of feel-good in the market concerning recovery and I think we have 7-8 percent to go on the top side," said Jonathan Barratt, chief executive of Sydney-based commodity research firm Barratt's Bulletin.

"Before Chinese new year, we saw a small draw down in copper stocks from Shanghai which means Chinese consumers will probably come back for a bit more after the New Year. The only potential downside is any strength in the dollar," he added.

Three-month copper on the London Metal Exchange had slipped 0.12 percent to $8,285.25 a tonne by 0712 GMT, from the previous session when it finished up more than 1 percent. After spending much of January close to flat, copper last week hit its highest since Sept. 20 at $8,346 a tonne.

However, volumes were exceptionally low with total turnover across the complex around 1,000 lots.

In other metals, zinc, which hit its highest in one year on Friday at $2,218 a tonne, was hovering within $20 of peaks from September 2011, and trading in greater volume than copper. The metal used to galvanise steel has powered ahead due to systems and chart-based buying, rather than fundamentals, traders said.

The Shanghai Futures Exchange is closed this week for the Lunar New Year.

Recovery hopes continue to buoy copper. The US economy likely expanded slightly in the fourth quarter as higher exports and a slump in oil imports narrowed the trade gap, suggesting a surprise drop in economic output reported last week was overstated.

With the road ahead looking a bit smoother, G20 finance ministers will be happy to ignore the wreck in the rear-view mirror when they meet this week to steer a course for the world economy.

European stock index futures pointed to a slightly higher open on Monday, adding to the previous session's recovery rally, although the gains could be limited by simmering worries over Spain and Italy.

Still, giving some headwinds to base metals, the euro dipped to a two-week low for a fleeting moment on Monday, while the yen clung on to recent hard-fought gains in a session that saw little conviction due to the Lunar New Year holidays.

WINDS OF CHANGE

Signs that consumers may be about to restock China's supply chain are bolstering copper, with the country accounting for 40 percent of refined copper demand.

China's exports and imports surged and new lending soared in January as the first hard data of the year signalled not only a solid recovery in domestic and overseas demand, but also the risk that inflationary pressures are building.

"Sentiment in the copper industry is the strongest we have seen in China since the survey began, which suggests orders could improve strongly after Chinese New Year," said Macquarie in a note.

"Inventory data suggests a rebalancing of the value chain looks imminent; stocks at smelters are critically low, while fabricators are planning to increase purchases. This is likely to drive prices higher and lead to a fall in bonded warehouse inventory," it added.

Shanghai copper stocks have dropped for the past three weeks to 196,699 tonnes, down around 15,000 tonnes from 9-month peaks seen at the start of the year.