Copper prices eased on Tuesday as jitters about falling demand from China surfaced after its stock market plunged nearly 9 percent, but analysts think the worry is overdone and see higher base metal prices ahead.
Generally lower base metals prices and news that South Africa might slap windfall taxes on resource firms battered the shares of London-listed miners. Anglo American, BHP Billiton, Rio Tinto, Xstrata and Kazakhmys all tumbled by around 5 percent, in contrast to a FTSE index that was down around 2 percent.
Copper for delivery in three months on the London Metal Exchange closed at $6,230 per tonne, down from $6,290 on Monday. Earlier, it lost more than 3 percent from Monday's two-month high of $6,374.
China's benchmark Shanghai Composite Index saw its biggest drop in a decade ahead of a parliamentary session next week rumoured to be considering higher interest rates to rein in ferocious economic growth rates.
"A cooler Chinese economy could mean lower demand for base metals," said Peter Fertig, director of commodities and asset allocation at Dresdner Kleinwort. "But once investors think about the situation they will recognise that growth in China will remain strong and in double digit figures."
In the longer-term analysts expect rising demand from China to replenish stocks after the de-stocking last year to push copper prices up towards $7,000. Traders said a 2,400-tonne stock drop in LME warehouses to 208,350 tonnes had helped trim copper's earlier losses. Aluminium was lower at $2,885 from $2,891 on Monday, when it touched $2,905, the highest since May 18.
Traders said the rally in aluminium prices in recent days has been technical and triggered by a break of key resistance at around $2,850. Some think the market will aim for $3,000 over coming days if hedging to cover option exposure escalates.
The existence of more than 9,100 outstanding contracts - more than 200,000 tonnes - to buy three-month aluminium at $3,000 a tonne is likely to create more volatility in the run-up to March 7, when the contracts expire.
A negative for aluminium, though, is that the backwardation - the premium for cash material over three-months futures - at around $40 a tonne is attracting material to LME warehouses. LME stocks have risen by nearly 50,000 tonnes to 796,800 tonnes since February 1, when the backwardation rose to around $114 on a squeeze by a dominant long position in the market.
"It is clear that there has been a major effort in recent weeks to push aluminium prices up through the psychologically important $3000," Sempra Metals said in a research note. "So far the effort has been rewarded with a modest increase in prices, but as with the previous efforts, the rally has again run into the sand around $2850-2900."
Nickel hit a new record high of $41,650 - also its closing price - on supply concerns and falling stocks, which stand at 3,282 tonnes - less than one day's global consumption. At the start of 2006 that figure was around 37,000 tonnes. Strong demand from stainless steel mills, supply disruptions and project delays have fired nickel prices, which have climbed nearly 70 percent since January 2006. Zinc was softer at $3,590 from $3,600, tin firmed to $13,550/13,600 from $13,475/13,500 and lead slid to $1,910 from $1,943.
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