BASE METALS: Improved Demand, Supply Concerns Lift Copper

Aug 31, 2011 NEW YORK (Dow Jones)--Copper locked in a second day of gains Wednesday as worries about supply and signs of better demand from China boosted prices.

The most actively traded contract, for December delivery, gained 6.30 cents, or 1.5%, to settle at $4.2045 a pound Wednesday on the Comex division of the New York Mercantile Exchange.

Copper for September delivery, the front-month contract, rose 6.40 cents, or 1.6%, to settle at $4.1870 a pound.

Copper prices marched higher as worries about disruptions to copper-mine output sparked concerns among market participants. Recent data from Chile, the world's largest copper producer, has shown that a series of mine workers' strikes in July substantially reduced copper output.

Moreover, traders are concerned that Freeport McMoran Copper & Gold Inc.'s (FCX) Grasberg mine in Indonesia will suffer a second work halt in as many months as contract-renewal talks have stalled.

"It seems that the workers at Freeport McMoRan's Grasberg will go on strike in the coming days," said Edward Meir, senior commodity analyst with MF Global.

The sentiment was reinforced by Goldman Sachs, which said it remains "very bullish" on copper as problems with supply will reduce the amount of metal available to the market by more than previously expected.

"Copper supply disruptions will amount to at least 8% of total production loss this year, compared to 4%-5% we had expected earlier in the year," Goldman said.

Signs that China, the world's largest consumer of copper, is back in the physical copper market are also giving copper prices a boost. Traders point out that the price of copper on the Shanghai Futures Exchange has pushed far above that traded on the London Metal Exchange, drawing copper stocks stored at LME warehouses in South East Asia to China.

"There's some speculation that China was involved [in buying copper] earlier in the month, particularly when copper was below $4.08," said Justin Lennon, base metals analyst with Mitsui Bussan Commodities.

This marks a shift from earlier this year, when Chinese copper users, like factories that make plumbing pipe or manufacture air conditioners, avoided buying the red metal while prices set records.

Traders who sold short copper futures earlier in the month have also been repurchasing those positions, market watchers said.

The number of open copper futures contracts, known as open interest, has declined by nearly 13,000 contracts to 115,807 recently.

Copper trading volumes remain low as the final week of August draws to a close. Many copper traders in Europe are taking time off for the final week of summer while in the U.S., investors are often away for the week before Labor Day.

Copper settlements (ranges include electronic and pit trading):
Sep $4.1870; up 6.40 cents; Range $4.1200-$4.2055
Dec $4.2045; up 6.30 cents; Range $4.1355-$4.2230