Shanghai Copper Falls for 5th Day, LME Flounders

SINGAPORE, June 17 -- Shanghai copper fell for a fifth day on Wednesday, and London metal dropped for a third day running, trading at its lowest in more than week, under pressure from worries the year to date surge has run ahead of fundamentals.

    Mixed economic data, including a decline in U.S. industrial output, and disappointing sales from U.S. electronics giant, Best Buy , fed worries about an anemic recovery, weighing on equity markets and souring sentiment after positive housing data.

    Metals markets have surged 70 percent in some cases in the year to date, leading some analysts to worry they have over-extended themselves and need to correct. "In the next few weeks we may see further corrections from these higher levels...from a fundamental view, we need this for investors to check the reality of demand," said Judy Zhu, commodities analyst at Standard Chartered in Shanghai. "Differentiation will be key in the second half. Crude oil will continue higher on tighter supply but base metals will be in a downtrend for the second half." Zhu said copper prices in the third quarter would average $4,750 a tonne, falling to $4,000 in the final three months of the year as supplies from Latin America increase, with mines like BHP Billiton's Escondida operation in Chile raising output on a recovery in ore grades and a resolution of technical problems.

    Shanghai's benchmark third month copper futures contract, September , fell 1.6 percent to 38,710 yuan a tonne by 0234 GMT. Shanghai copper has fallen for five sessions running, its longest string of losses since the Lunar New Year in January.

    Copper for delivery in three months on the London Metal Exchange fell $65 to $4,915 a tonne, dipping as low as $4,900, its weakest since June 5, retreating further from last week's 8-month high of $5,388.

    Short term, U.S. consumer price data due at 1230 GMT could shift metals one way or the other. A steeper-than-expected rise could lift prices as investors look for hard assets as a way to make their portfolios inflation-proof.

    But Chinese inflation was unlikely to be an issue this year, a senior statistics official said.

    "Our country will not see the appearance of inflation this year, and its real worries are still deflation," Yao Jingyuan, chief economist at the National Bureau of Statistics, was quoted by the official China Securities Journal as saying.

    "Excessive capacity will effectively check the appearance of inflation, keeping prices at low levels for the whole year," Yao was quoted as telling a forum in Shenzhen.

    Not all analysts were as downbeat as Zhu. Goldman Sachs said the downward move in copper would be short-lived amid growing expectations of a recovery in global economic growth, and it targeted copper at $5,800 a tonne by the end of 2010.

    "As usual it all boils down to China," a dealer in Singapore said. "As that economy starts to fire on all cylinders and that stimulus money has its way with the economic data, real demand will rise.

    "The question in my mind is how much of that demand will be met from the material the government has stockpiled. In the case of aluminium and zinc, I can see quite a lot, but my feeling is that they are storing copper for the long haul."

    LME aluminium shed $20 to $1,590 a tonne, while Shanghai metal dropped 35 yuan to 13,300 yuan. LME stocks of aluminium jumped 47,225 tonnes on Tuesday to a record above 4.3 million tonnes.

    "We are seeing a lot of restarts in capacity in aluminium and zinc, not only in China but elsewhere. Inventories of both metals are very high," Standard Chartered's Zhu remarked.

    "We are very worried about this mothballed capacity and that is one of the main reasons we expect prices to trend down later this year."

    Shanghai zinc fell 0.6 percent to 13,380 yuan. LME zinc dropped $9 to $1,560.

    (Source: Reuters)