METALS-Copper falls to one-month low on Chinese investigation

Fri Jun 6, 2014 12:32pm EDT

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By Harpreet Bhal and Maytaal Angel

LONDON, June 6 (Reuters) - Copper dropped to a one-month low on Friday and was on track for its biggest weekly fall in nearly three months as an investigation into metal financing in China prompted speculation that a crackdown could hit trade in the metal.

Benchmark copper on the London Metal Exchange (LME) hit a session low of $6,640 - a level last reached on May 8 - before paring losses to close down 1.39 percent at $6,686 a tonne.

It was on track to post a 2.5 percent drop for the week, the biggest weekly fall since mid-March.

Some copper cargoes held at China's Qingdao Port were being shipped to more regulated LME warehouses, industry sources said, as banks and trading houses took precautions over an investigation into metal financing at the world's seventh-busiest port.

Using collateral such as copper is a popular way to raise finance in credit-strapped China, the world's biggest buyer of the metal, and the probe into metals stocks in Qingdao port has evoked memories of a huge March sell-off on worries about contagion in the country's credit markets.

"The ongoing investigation about the China Qingdao port is still impacting the metal. Once the Chinese situation is clear, we expect the rally to continue for the metal, unless there are some big discrepancies," said Naeem Aslam, chief market analyst at Ava Trade.

Trading sources have said port authorities in Qingdao are conducting the investigation but little has been confirmed. There has also been little sign it has spread to other ports.

"We suspect things will ease when investors have a better idea as to how much metal is involved and what steps the authorities are going to take. Already, we are hearing that metal is moving to regulated exchanges," said INTL FCStone analyst Ed Meir in a note.

Limiting losses in copper, U.S. employers kept up a solid pace of hiring in May, returning employment to its pre-recession level and offering confirmation the world's largest economy has snapped back from a winter slump.

Also helping underpin copper, European stocks rose and bond yields tumbled as investors were buoyed by the European Central Bank's (ECB) promise to douse potential deflation with bundles of cash.

"The ECB's new measures have certainly ignited new hopes of growth in Europe, which may bring more demand for the metal in the future," Aslam said.

FINANCING WORRIES

China will cut the reserve requirement ratio (RRR) further for some banks when appropriate, the bank regulator said, only a week after the government lowered the RRR for the second time in two months to bolster economic growth.

Some investors speculate that Chinese authorities would further loosen policy to shore up growth, such as reducing the RRR across the board for all banks.

Still, firms holding copper stocks in bonded warehouses in China sold more metal on fears that they would not be able to obtain inventory financing from banks, pushing down premiums nearly 50 percent this week, traders in Shanghai said.

The copper stocks traded at premiums of $70-$80 a tonne over the cash LME price this week, versus about $120-$130 last week, they said.

"You're seeing material being sold for two reasons - because those financing deals are being unwound and people who picked up material purely on a speculative basis will take profit now," one Singapore trader said.

Traders in Shanghai said offers to sell bonded copper had been rising since Wednesday as developments at Qingdao stoked fears among some owners of the stocks that it would be hard to obtain financing from banks in the near term.

In other metals, tin closed down 0.30 percent at $23,175 a tonne, while nickel was last bid down 1.05 percent at $18,850 a tonne as investors continued to take profits after bidding the metal up nearly 40 percent this year on Indonesia's ore export ban.

Refined tin shipments from top exporter Indonesia jumped to 12,778.81 tonnes in May, a trade ministry official said, implying an increase of 145 percent from the previous month and the highest level since December.

Aluminium was last bid up 1.51 percent at $1,878 a tonne, having earlier hit its highest level since late April at $1,875 a tonne, zinc ended up 0.77 percent at $2,104 a tonne, and lead closed little changed, up 0.02 percent at $2,109 a tonne

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 Melanie Burton in Sydney and Polly Yam in Hong Kong; Editing by Pravin Char)

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