Copper Slumps After China, Biggest User, Raises Interest Rates

Oct. 19 （Bloomberg） -- Copper fell from a 27-month high after China, the biggest consumer of the metal, increased its lending and deposit rates to curb inflation.

China’s inflation quickened to 3.5 percent in August, the fastest pace in 22 months. Industrial metals including aluminum and tin also retreated, and the dollar jumped as much as 1.6 percent against a basket of six major currencies.

“Copper is most sensitive to demand from China,” said Adam Klopfenstein, a senior market strategist at Lind-Waldock in Chicago. “China’s steps to rein in inflation will hurt any industrial metal.”

Copper futures for December delivery fell 9.75 cents, or 2.5 percent, to settle at $3.7575 a pound at 1:19 p.m. on the Comex in New York, the biggest decline for the most-active contract since July 16. Yesterday, the metal reached $3.88, the highest price since July 2008.

The People’s Bank of China said the one-year lending rate will increase to 5.56 percent from 5.31 percent, effective tomorrow. The deposit rate will increase to 2.5 percent from 2.25 percent, the bank said on its website.

“Copper is very much dependent on growth in China, so you can see a build-up in inventories from this,” said Frank McGhee, the head dealer at Integrated Brokerage Services in Chicago.

Fed Expectations

Copper has gained 2.9 percent this month as the dollar slid against the currency basket on expectations that the Federal Reserve will further ease monetary policy to bolster the economy. The benchmark U.S. interest rate has been at zero percent to 0.25 percent since December 2008.

“This could represent the first move in a new approach from the Chinese authorities,” said Nic Brown, an analyst at Natixis Commodity Markets Ltd. in London. “If the Fed is to go ahead with more quantitative easing, China may have decided that simply raising minimum reserve ratios isn’t enough anymore.”

On the London Metal Exchange, copper for delivery in three months dropped $183, or 2.2 percent, to $8,260 a metric ton （$3.75 a pound）. Aluminum, lead, nickel, tin and zinc also fell on the LME.