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2nd UPDATE: China Provides Near-Term Boost To Copper Sentiment
Feb 15,2011 09:42CST
industry news

Feb. 14 (Bloomberg) ----If participants in the base metals markets were looking to China for price direction clues, then the release Monday of bullish import data for January is certainly providing them.

As China officially overtook Japan to become the world's second largest economy, preliminary data provided by the General Administration of Customs showed China's copper imports touched a four-month high in January, narrowing the country's trade surplus and renewing confidence in the metal's near-term price prospects.

Copper rose 1.7% on the London Metal Exchange to $10,131 a metric ton, still shy of last week's record high of $10,160/ton but setting the tone for Monday's trading session. Yet while the data are positive, brokers and investors remain unconvinced that the rise in imports will be sustained because China's trade figures are typically very volatile at the beginning of the year due to distortions caused by the variable timing of the Lunar New Year holiday.

The data showed that China imported 364,240 tons of copper, copper alloy and semifinished products in January, an increase of 5.7% from December and a rise of 25% from the same month a year earlier.

The data confounded expectations for much lower imports given anecdotal evidence that physical demand was weakening and that the arbitrage--or difference between LME and Shanghai prices--didn't encourage trade.

"While the market has taken the import figure as a bullish sign, we remain cautious as the data are backwards looking and essentially reflect the market conditions, and expectations during the preceding couple of months, rather than the current picture," said Standard Bank's Leon Westgate.

Export data for last month haven't yet been released, and merchants and brokers active in China said it's possible the anticipated rise in exports will, at the very least, reduce the net import-export figure for copper, and could in actual fact lead to a lower net figure on the month.

The figure isn't expected to be released until next week, when the detailed import data are revealed.

The rises in exports comes as the soaring price of copper and the lack of easy financing has forced many Chinese investors who bought and stockpiled metal to sell it to merchants active in the region. Stocks in official exchange warehouses have also been steadily rising as material imported into China is now being re-exported to take advantage of the fact that LME cash prices are higher than future prices.

LME stocks are at six-month highs, with locations in the U.S., particularly St Louis and New Orleans, accounting for 68% of metal on warrant. But it's warehouses in South Korea, Malaysia and Singapore, which account for about 24% of the metal, that have seen the biggest stock rises of late. Europe holds the rest of the metal.

Shanghai Futures Exchange and Comex exchange stocks are rising, while copper in bonded warehouses in China is rapidly increasing.

Opinions are divided over the outlook for copper and the other base metals. Barclays Capital said the base metals are now at a "crossroads," with market participants expecting a big pick-up in buying, and buyers seeing lower prices. "Something will have to give," Barclays added.

The bank--which expects copper to average over $13,000/ton by year-end--is anticipating a big increase in base metals demand amid a new found confidence in the sustainability of economic growth.

But others caution that copper is now due a correction.

Standard Bank's Westgate said the metal is at "the center of a battleground," with last week seeing over 63,000 lots trade on the LME's electronic trading system, for what resulted in only a $100/ton fall on the week. "Assuming an average copper price of $10,000/ton, well over $15 billion changed hands. A startling amount of ammunition has therefore been expended keeping copper above the $10,000/ton mark, suggesting a potentially violent reaction should positions start to be unwound," he added.



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