LME copper up on steady China demand, Asian equities

SHANGHAI: LME copper bounced up on Wednesday, lifted by arbitrage trading, relative calmness in Asia's equities market and optimism about China's metals consumption for the rest of the year.

But worries about the debt crisis and slowing growth in the euro zone will likely limit price rises.

Three-month copper on the London Metal Exchange ticked up 0.3 percent to $8,852.25 a tonne by 0731 GMT, after losing 0.9 percent in the previous session.

"Copper's rise on the LME today was led by gains on the Shanghai Futures Exchange, which seems mostly led by short-covering," said a Shanghai-based trader.

The most-active November copper contract on the ShFE rose 0.5 percent to close at 66,800 yuan per tonne, after falling 1.2 percent in the last session.

Asian shares rose 2.6 percent despite overnight falls in equities after France and Germany failed to live up to market expectations for a solution to Europe's debt crisis.

Traders reported some arbitrage deals with the LME third-month contract trading at a 419 yuan-discount to the SHFE most active contract, taking into account China's 17 percent VAT.

"Asian stocks look quite stable today. Copper and other base metals have come to a point where it's hard to fall or rise too far before we see a technical rebound or correction. With global uncertainties, prospects of tightening in China and no big disruptions in supply, there are limits to price rises," said CIFCO analyst Zhou Jie.

"Whereas the fact that prices have fallen quite a bit over the past few weeks and China's continued GDP growth have put a floor to prices too. After the destocking in base metals in China earlier this year, there should be some restocking for the rest of the year if the economy continues to grow at this rate."

The Shanghai Metals Market said in a recent note it saw steady demand for copper from makers of water pipes and seawater desalination pipes despite a seasonal downturn in demand for airconditioning pipes.

August copper orders may decline slightly from July's levels but will stay stable, it added.

Traders also note that the consecutive raising of the yuan's midpoint recently has encouraged hopes of further strengthening in the Chinese currency, which will encourage imports.

The euro zone economy slowed sharply in the second quarter, hobbled by sluggish growth in Germany and stagnation in France, raising fears of a longer-term dip that could derail efforts to resolve the bloc's debt crisis.

The picture was equally grim for the region's high debtors -- particularly Greece, Italy, Spain, Portugal and Ireland -- where little or no growth means debt-cutting targets will be even harder to achieve as tax revenues shrink and welfare payments rise.

Fitch Ratings on Tuesday confirmed the United States' top-notch credit rating and, in blatant disagreement with rival Standard & Poor's, gave a vote of confidence to Washington's deficit-reduction efforts.

US industrial output recorded its best gain in seven months in July as the auto sector rebouned from supply disruptions wrought by Japan's earthquake in March.

Traders also reported some arbitrage deals for zinc, even though some believe the spread is still not wide enough for physical deals at current prices.

"You lose about 80-100 yuan per tonne with the current spread, but some people are doing it anyway as they think that it'll pay off as the yuan continues to appreciate," said another Shanghai-based trader.

"These people will buy LME third month and sell SHFE fifth or sixth month contract, hoping that it will all work out by the time they import the material."

LME third month zinc was trading at a discount deeper than 800 yuan to ShFE January zinc contract . But actual margins from such a deal will partly depend on the premium one secures.

Traders reported a wide range of premiums offered for LME zinc in Shanghai right now, from $80 to $200, about 511 - 1277 yuan.

Copyright Reuters, 2011