METALS-Copper rises off 2-month lows as tight supply suggests gains

Tue Feb 4, 2014 12:05pm EST

Related Topics

* LME stock tightness offsets poor U.S., China factory activity

* Interest in CME aluminium premium contract picks up

* China markets closed until Friday (Updates with closing prices)

By Maytaal Angel and Harpreet Bhal

LONDON, Feb 4 (Reuters) - Copper steadied on Tuesday after hitting a fresh two-month low, as investors weighed near-term supply tightness against tepid U.S. and Chinese factory data and an emerging markets selloff.

Daily London Metal Exchange data showed copper stocks fell to 313,275 tonnes, their lowest in over a year, with up to 60 percent of that figure booked to leave warehouses and so unavailable to the market. MCUSTX-TOTAL

But weighing on copper, U.S. manufacturing activity slowed sharply in January on the back of the biggest drop in new orders in 33 years while construction spending barely rose in December, pointing to some loss of steam in the economy.

In China, factory growth eased to an expected six-month low in January, hurt by weaker local and foreign demand, heightening worries of an economic slowdown.

Three-month copper on the London Metal Exchange closed at $7,041 a tonne, up from a close of $7,038 on Monday. It earlier hit $7,016, its lowest since Dec. 4, and is down some 4 percent since Jan. 21.

"There's some buying interest because the emerging-market crisis is going to be temporary and is not going to include a meltdown in China," said Jesper Dannesboe, senior commodity strategist at Societe Generale.

"If you see it that way, at some stage copper is going to be a buy because the fundamentals keep tightening. (Also) it's hard to believe that the U.S. recovery has stalled, because it was very broad-based."

Emerging market stocks trimmed losses on Tuesday after hitting a five-month low, while most currencies rebounded as investors paused a selloff that had been triggered a day before by concern about Chinese and U.S. growth prospects.

The U.S. Federal Reserve, bolstered by long-standing signs of recovery in the world's largest economy, is reducing its huge monetary stimulus - a move that has partly prompted the bruising selloff in emerging markets.

Financial markets in those countries have boomed in recent years as the Fed's measures to bolster economic growth at home - including ultra-low interest rates - encouraged investors to seek higher returns in emerging economies.

China's government, meanwhile, wants to reduce reliance on the investment and exports that have fuelled economic growth in the past three decades in favour of consumption and services, which it thinks will provide lower but more sustainable growth.

China, the world's largest copper consumer, is on a week-long Lunar New Year holiday which began late last week. Chinese markets will reopen on Friday.

"We may see a relatively quiet period for the balance of the week, but I suspect that weakness in both the equity and commodity markets could resume once China comes back from holidays next week," Ed Meir, analyst at INTL FCStone said.

Aluminium, which hit a four-and-a-half-year low of $1,671.25 a tonne on Monday as a global surplus weighs, ended at $1,689 from a close of $1,677 a tonne on Monday.

"With macro fundamental factors also weighing on commodity sentiment, aluminium looks set for a rough ride," broker Triland said in a note.

This may ring true in particular for a single large holder of long aluminium positions on the LME, equivalent to 30-39 percent of outstanding LME open interest in February, LME data shows. <0#LME-FBR> MAL-OI-P1

The position is roughly equivalent to 890,000-1.15 million tonnes, or $1.5-$1.9 billion at current prices.

"By the looks of things, there will be someone in pain ... lots of consumers who hedged around $1,750 are all underwater as well," said a trader based in Singapore.

Physical players are getting hit by high premiums while speculators have been caught because they bought too early, the trader added.

Turnover in CME Group Inc's nascent aluminium premium contract has picked up since the start of the year as industrial users seek to protect themselves against further gains in physical prices, data and market participants said.

Zinc closed at $1,951 from $1,956, lead ended at $2,093.50 from $2,083.50, tin ended at $22,175 from $22,125 and nickel closed at $13,850 from $13,880.

PRICES

Three month LME copper

Most active ShFE copper

Three month LME aluminium

Most active ShFE aluminium

Three month LME zinc

Most active ShFE zinc

Three month LME lead

Most active ShFE lead

Three month LME nickel

Three month LME tin (Additional reporting by Manolo Serapio Jr. in Singapore and Melanie Burton in Sydney; Editing by Dale Hudson, Anthony Barker and David Evans)

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