China Demand Buoys LME Prices; Mkt May See More Gains

SYDNEY--Strong Chinese demand at the start of the second quarter has helped boost copper prices to a four-month high on the London Metal Exchange and left the base metals market well placed for another leg higher, market participants said Wednesday.

The market has been banking on a rebound in Chinese demand after the end of March to lead metals prices higher, and expectations of sustained buying in China should boost the LME bellweather copper contract higher to target $7,500 a metric ton, basis three-month delivery, said Haihua Shen, senior trader at China's Maike Futures.

And there appears to be general agreement.

"The underlying picture for copper and the rest of the LME is one of firm demand and a number of positive influences have come together," said Commonwealth Bank of Australia Analyst David Moore.

Copper prices broke through the $7,000/ton resistance for the first time in four months Tuesday on short covering, fund buying and options-related buying after several bullish factors conspired to buoy sentiment, a trader said.

The rest of the LME board also performed strongly, with LME nickel prices hitting a record $48,700/ton and now firmly on course to breach the $50,000/ton level, Barclays Capital said in a technical note.

Aside from this week's positive U.S. housing sector data that turned in a more positive than expected number of a rise of 0.7% in pending home sales, up on a forecast decline of 0.5%, "reasonable growth levels" in Japan and Eurozone add to China delivering on demand expectations, Moore said.

Meantime, UBS tipped a "good year for resources demand" in China over the next twelve months.

"Overall commodity demand looks solid going forward - no big acceleration surprises in 2007, in our view, but also no sharp downward pressures. Second, and equally important, our regional and global commodity teams see tighter supply conditions in nearly every area," UBS said in a report.

The upcoming long Easter weekend might pare some gains on profit taking and book squaring but copper's break higher has moved prices out of their bearchannel, boosting potential for prices to rise further, Barclays Capital said.

Large Number Of Speculative Shorts In Copper
 
While looking overbought, a "large number" of speculative shorts indicate that copper can continue to push higher, said JP Morgan Analyst Michael Jansen.

The LME price rally will likely to sideline some Chinese consumers, particularly copper fabricators, but low inventory levels mean manufacturers "won't be able to wait for long," Shen said. Consumers might find some consolation in copper scrap prices that are currently trailing the LME price hike, he added.

Low LME stocks - particularly for copper, nickel, lead and tin - and a tight supply situation will keep the market sensitive to more disruptions, such as the current strike at Doe Run's Peruvian metallurgical complex that produces copper, lead, zinc and smaller amounts of gold and silver.

"Disruptions such as that at Doe Run could push the copper market that is in a small surplus at the moment, back into a deficit," Shen said.

"With nickel and lead setting fresh record highs yesterday and aluminum back at $2,850/ton, sentiment certainly seems to be bullish and we think this will carry the whole complex higher as we move further into the second quarter," said William Adams at BaseMetals.com.

At 0730 GMT, LME copper was trading around $7,275/ton, up $45 on the Tuesday PM kerb; nickel stood at $48,650, up $65 and lead at $1,980, up $21.