Shanghai copper down 4.2 pct on LME decline

SHANGHAI, Jan 19 - Shanghai copper futures fell 4.2 percent on Friday after weak oil prices knocked London futures sharply lower.

The most active March contract lost 2,220 yuan to 51,330 yuan a tonne by the close and was 3.2 percent down from Thursday's settlement price.

"There is a lot of volatility but very little direction," one trader said.

"I don't think demand in China is as strong as many people think and it won't pick up until after the (Lunar) New Year."

He said Chinese consumers were very price sensitive and while they may buy when prices dip to lower levels, they withdraw from the market and look for substitutes if the market rallies.

Spot copper prices in Shanghai were down 850 yuan, quoted between 54,450 yuan and 54,700 yuan.

"Traders are disappointed with the falls in London on Thursday. Buying expected around $5,500 did not emerge, dampening Shanghai dealers' sentiment for a recovering market," said Wang Zheng, analyst at Dalu Futures.

London Metal Exchange copper futures for delivery in three months were lower at $5,520 a tonne at 0713 GMT, from $5,560 on Thursday when prices fell 1.6 percent. Crude oil was down 11 cents at $50.37 a barrel.

"Copper is likely to remain volatile, pressured by a weaker oil price and a net short on COMEX but supported at lower levels," Standard Bank London said in a report.

Support for copper was seen at $5,500, while resistance was in place between $5,800 and $6,000.

UBS analyst Robin Bhar said the trend of stock rises in LME warehouses could reverse as metal flowed from LME into China.

"We think the rush of metal to China will reverse the pattern of stock rises on the LME."

On Thursday, LME copper stocks in South Korea, one of the closest LME warehouse locations to China, totalled 33,800 tonnes, of which 13,750 tonnes or 41 percent are on cancelled warrant and are earmarked for delivery.

Global LME stocks stand at 198,250 tonnes and the ratio of cancelled warrants is 11.5 percent. Stocks have doubled in the past 12 months. LME nickel was $35,200 a tonne, down from $35,400 on Thursday when the metal hit a record $36,050.

"Nickel is going to be very volatile. Together with zinc it probably has the best fundamentals," Bhar said.

"On the supply side there is a structural issue and the only way to control prices is by demand destruction. We think prices will peak in the first half and that implies a weaker second half.

"But it will have to be a very weak second half for prices to meet average forecasts for the year."

In a Reuters poll earlier this week, cash nickel was expected to average $26,448 a tonne in 2007 and $21,495 in 2008. [MET/POLL]

Upward pressure on prices could ease after a general strike that crippled production at New Caledonia's Doniambo smelter and the mines that supply it with ore ended late on Thursday. [nSYD27600]

March Shanghai aluminium futures fell to 19,420 yuan from 19,550 yuan. LME aluminium lost $20 at $2,680.

Premiums for LME cash metal above the three-months price hit $120 on Monday, up from $30 at the start of 2006 and the highest since 1990.

On Friday, the cash to three-months spread was $98/100.

"It appears as if the same entity that has a large physical position also has considerable open interest in call options especially at the $3,100 strike," Bhar said.

"Their plan appears to be to try and get the delta hedging to kick in. They may try to encourage delta hedging against lower strikes and get the ball rolling towards $3,100."

In aluminium, call options - options to buy -- are in place between $2,800 and $3,100.

As prices get closer to option strikes, option granters buy or sell metal in order to manage risk. The process, known as delta hedging, can reinforce price moves.

 "The probability is that aluminium