METALS-Copper falls after China factory data hits recovery hopes

Thu May 23, 2013 8:47am EDT

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By Eric Onstad and Rosalba O'Brien

LONDON, May 23 (Reuters) - Copper reversed the week's gains, sliding as much as 3 percent on Thursday after a survey showed factory activity in top metals consumer China shrank for the first time in seven months.

Benchmark three-month copper on the London Metal Exchange slid 3.2 percent to a session low of $7,233 per tonne. It failed to trade in official rings but was bid at $7,319.5 per tonne.

Other industrial metals also fell, with aluminium down 1.4 percent to $1,857 per tonne and nickel sliding 2.0 percent to $14,870 after a survey of Chinese purchasing managers (PMI) showed factory activity contracted for the first time in seven months in May.

China is the world's biggest consumer of industrial metals, taking 40 percent of the global supply of refined copper.

"The data have maybe given people a bit of a reality check, but it shouldn't have come as a surprise. All the indications from the Chinese economy at large have been suggesting a very muted recovery," said analyst Robin Bhar at Societe Generale in London.

Also weighing on the market were hints from the U.S. Federal Reserve chief on Wednesday that the bank would end its bond-buying program earlier than expected, eroding liquidity and investment capital available for metals.

"For so long people have taken for granted that money will be free. But as soon as it's not free, then that's when we are going to see big ruction in metals markets," said Matt Fusarelli, analyst at consultancy AME Group in Sydney.

The Chinese data and U.S. comments also hit oil and world stock markets and overshadowed a PMI survey in the euro zone, which showed tentative signs the downturn was easing slightly.

The uncertainty also failed to be stemmed by U.S. data on Thursday, showing jobless claims dropping more than expected last week.

After hitting a six-week high of $7,533.75 a tonne on Wednesday, copper has given up the week's gains.

The weaker market was also reflected in a move by investment bank Goldman Sachs, which gave up on a previous bullish recommendation and advised clients to cut losses.

Goldman had told clients to go long in copper on March 1, forecasting a bounce back to around $8,000 a tonne, but instead the market tumbled, so the bank said the trade should be closed with losses of $236 a tonne or 3.1 percent.

Copper losses were capped by a continued shutdown at one of the world's biggest mines in Indonesia, which suspended operations on May 15 after a tunnel collapse killed 28 workers.

A trade union official said on Thursday all investigations into the incident at Freeport McMoRan Copper & Gold Inc 's Grasberg mine must be completed before workers return.

Soc Gen's Bhar said the LME copper market was unlikely to revisit 18-month lows hit early in the month of just below $6,800 a tonne due to support from restricted copper supply, including the length of the mine closure.

"It may be that the supply side comes to the rescue of a fairly weak demand uptick so far in copper," Bhar added.

India's top copper smelter, run by Sterlite Industries, has also been shut since the end of March, with a court hearing into complaints of polluting emissions due to resume on Monday.

A landslide at Rio Tinto's mine in Utah has also cut production.

In the official ring, zinc traded at $1,855, down 1.4 percent, lead was down 1.2 percent at $2,032, while tin was down 2 percent to $21,050.

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