European manufacturers see copper cheap, euro strong; buy forward

Thu Mar 13, 2014 8:14am EDT

* Some carmakers, other buyers lock in copper to 2017, 2018

* Analysts expect low prices to last for short time only

By Susan Thomas and Harpreet Bhal

LONDON, March 13 (Reuters) - European metal products manufacturers are seeing the most favourable conditions for buying copper in over two years as prices drop and the euro strengthens, and some are buying forwards to lock in cheap supply.

Copper had been in freefall for three straight sessions, touching its lowest level in more than three years on worries that financing deals that have locked up vast quantities of metal in China could unravel.

At the same time the euro is near a 2-1/2 year high against the dollar, the currency used to price metals.

"For European consumers, they have a double whammy in their favour. This is the first time copper has been at these lows at the same time the euro is at its highs," Societe Generale analyst Robin Bhar said.

"Some of the car manufacturers are buying, because it is so attractive in euro terms."

Companies that use copper to make electrical wiring, roofing, plumbing fixtures and industrial machinery have been using the forwards market to lock in supplies for 2016, 2017 and even 2018 at prices below 5,000 euros ($6,900) a tonne, according to Bhar and some consumers.

In euro terms, three-month copper futures were trading at around 4,645 euros per tonne on Thursday, after hitting their lowest since early 2010 at around 4,600 euros on Wednesday.

The March 2017 copper contract dropped to 4,800 euros on Thursday, compared with around 5,338 euros in early January.

"It's just too attractive to pass up," one European trader at a large manufacturing company said.

Business is looking even better after data on Wednesday showed euro zone industrial output had risen faster than expected year on an annual basis in January, pointing to continued economic recovery. Exports have risen and investment is improving.

Strong car sales figures from Germany, Italy and Spain have added to the growing optimism. Sales in Germany, Europe's biggest autos market, climbed 4 percent.

"We are advising our clients to take this opportunity ... to hedge for the medium and long term," Gianclaudio Torlizzi, a partner at Italian metals consultancy T-Commodity, said.

"Maybe this will be the last such opportunity in two years. Maybe never again."

MOVE QUICKLY

Benchmark three-month copper contracts have been falling steadily since January.

The drop accelerated late last week following China's first domestic bond default, which raised concerns that financiers who had bought copper and deposited it as collateral for loans could be forced to pull out of their deals and dump the copper on the market.

Such of that copper is being sold already. "We are seeing liquidation of positions by Chinese players, who are in a panic selling mode," Torlizzi said.

The LME contract slid to a session low of $6,376.25 a tonne on Wednesday, its weakest since July 2010. It was trading at around $6,440 a tonne on Thursday, down nearly 9 percent from a week ago.

The most-traded June copper contract on the Shanghai Futures Exchange <SCFcv1 fell by 5 percent on Wednesday to 43,660 yuan ($7,100) a tonne, its lowest since July 2009, before recovering to around 45,000 yuan on Thursday.

Torlizzi is advising his clients to move quickly, saying the fundamentals do not justify the current lows.

"We are quite close to the bottom, between $6,200-$6,350. Going lower would mean the Chinese economy is in a hard landing scenario, which my data is not confirming at all," he said.

Commerzbank described the fall as "excessive" in a research note. "There is no fundamental justification for its low level. What is more, the price does not reflect the current supply-demand situation on the global copper market. It is very tight."

Analysts polled by Reuters in January expected surplus stocks of copper to tighten significantly this year and next as new mine output fails to translate into refined metal.

"The fact that prices are now almost 10 percent lower may actually stimulate some demand, whereas higher prices would have maybe kept some of that demand away from the market," Bhar said.

"Fundamentally the market has come around to a much fairer value."

The metals industry in Europe is traditionally conservative, and some firms are unable to take advantage of the current situation to hedge prices years ahead. One fabricator said his firm was "happy to sit back and watch for now ... We will get excited if more orders come in". (editing by Jane Baird)