Copper sinks on weak euro, nears year-to-date low

NEW YORK/LONDON Wed May 16, 2012 5:33pm EDT

NEW YORK/LONDON (Reuters) - Copper came close to wiping out its year-to-date gains after the red metal and the euro hit four-month lows on Wednesday amid mounting fears of a Greek exit from the euro zone.

The European debt crisis deepened with news that the European Central Bank had stopped providing liquidity to some Greek banks. These banks have now been moved to the ECB's emergency liquidity assistance program.

Notching a fourth consecutive day of losses, traders warned that copper prices had little technical support in the near term.

"Speculators are still on the sidelines and the physical market is holding back. China's got a speed bump of inventory to deal with and clients are not doing anything. That's the problem," a New York trader said.

He pegged the next support level at $3.38 per lb, about 10 cents lower than Wednesday's settlement, but said even that was very tentative.

Risk aversion rose as talks in Greece for a new government failed, forcing another round of elections, before being briefly quelled after comments by German Chancellor Angela Merkel and new French President Francois Hollande that they wanted Greece to remain in the euro zone. <ID:L5E8GFMLC>

Three-month copper on the London Metal Exchange settled at $7,665 per tonne, down over 2 percent from $7,825 in Tuesday's official session. It earlier fell to $7,625, its lowest since January 10. Copper, which had rallied by more than 12 percent by early February, has shed almost all of its 2012 gains.

In New York, the July COMEX contract shed 1.12 percent to settle at $3.478 per lb, after trading in a range of just over 6 cents on the day.

That settlement is just 7 cents shy of year-to-date lows of $3.40 per lb hit in the first few days of January.

Lack of investor interest and caution were visible in the volumes, with just over 67,000 lots changing hands in late afternoon trade in New York, well below 30-day averages.

"One of the more concerning aspects of the global economy is China, where we have some indicators suggesting that growth is slowing more meaningfully and that things look perhaps a little more worrying with respect to how much support that will give to metals," analyst Dan Brebner of Deutsche Bank said.

"That said, we've had a decent correction. It doesn't take much for things to turn around, but given where we are now I think it's looking a bit overdone."

Data last Friday showed China's economy slowing. Industrial production growth slowed sharply in April and fixed-asset investment -- a key growth driver -- hit its lowest level in nearly a decade. China is the world's largest consumer of copper.

U.S. industrial production posted its fastest growth in over a year in April, although the Federal Reserve revised its estimates for prior months.

Still, overarching macroeconomic uncertainty led Commerzbank to cut its 2012 and 2013 price forecasts for base metals on Wednesday.

"We believe the risks currently outweigh the opportunities. In the short term we therefore see further correction potential for all commodities, to which base metals will also not be immune," the bank said in a note to clients.

CHINA BOND

Bonded stocks of copper in China have begun to fall sharply, which could hit LME copper prices as well as physical premiums in China, Goldman Sachs said in a research note.

The bank said bonded stocks had dropped to 550,000-570,000 tonnes from a peak of 640,000-650,000 tonnes as of end-April.

"This fall in bonded stocks reflects a reduction in the profitability of financing deals post the LME spread tightening in mid-April. Some financing deals likely came to an end as a result with LME short positions likely being delivered into and exports likely to pick up to LME warehouses in the coming weeks," it said.

Other metals closed mixed. Tin finished at $19,675 from $19,810 at Tuesday's close while zinc ended at $1,898 from $1,934.

Lead ended at $1,971 from $2,008. Aluminium recovered to $2,035 from $2,025 while nickel rose to $17,005 from a close of $16,995.

Indonesia's finance minister said on Wednesday the country would apply an export duty of 20 percent to 21 metal ores and concentrates, extending a list of 14 metals, including copper and nickel, proposed earlier this month.

The global zinc market was in surplus by 97,000 tonnes in the first three months of the year, while the global lead market was in surplus by 37,000 tonnes, a bulletin from Lisbon-based International Lead and Zinc Study Group showed.

(Editing by Dale Hudson)

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