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China fears thought overdone; London copper prices rise

London copper prices rose on Friday after falling 2.3% the previous session on the back of concerns China may tighten monetary policy
Author: Nick Trevethan
Posted: Friday , 21 Jan 2011


SINGAPORE (REUTERS) -
London copper prices rose on Friday, after shedding 2.3 percent in the previous session on concerns that China may tighten monetary policy in the wake of strong macroeconomic data, while Shanghai fell, catching up with the previous decline in the international market.

Three-month copper on the London Metals Exchange rose $50 to $9,405 a tonne by 0354 GMT. The metal hit a record high of $9,781 on Wednesday. Shanghai's benchmark third-month copper futures contract fell 0.5 percent to 71,230 yuan a tonne.

A sharp jump in China's annual growth rate and a smaller-than-expected slowdown in December inflation pressures fed expectations of further policy tightening measures that could hurt the country's demand for base metals.

"Our reading of the numbers was that they were the best you could hope for. GDP is growing, inflation appears contained and interest rates are 150 basis points below pre-crisis levels," said Ben Westmore, commodities economist at National Australia Bank.

"The risk to the macro outlook is that Beijing commits a policy error and tightens too quickly. But so far their tightening has been orderly, and while that continues, it mitigates the risk of such an error."

A trader in Shanghai said there had been selling interest from Western players through much of the Asian day on Thursday, but it was met by buying from the Chinese side. Only once China closed was that selling given free rein.

"It's interesting that the China data was in the market for five hours or more before prices really moved," he said.

"We saw something very similar last year when U.S. macro players sold large volumes of copper and drove prices down by $1,500 or so after China raised reserve ratio requirements for the first time," he said.

The drop in London helped bring it closer into line with Shanghai, which has lagged London's run to record highs.

Shanghai copper traded around 1,300 yuan below LME, having narrowed from 3,000 yuan or more over about a week.

Aluminium ticked higher, shrugging off news that Rio Tinto had terminated force majeure at its Boyne Island smelting division in Australia's Queensland state as transportation returned to normal.

But there were concerns of over-capacity and the risk that mountains of metals tied up in financing deals could be released to the market.

"On the aluminium market, I still quite bearish. There is a lot of smelter capacity that has the potential to come back on, especially where prices are at the moment," Westmore said.

He also noted that the cash to three month spread in aluminium had become more volatile after a long period of stability through 2010, narrowing from $30 contango to $8 at times, potentially discouraging stockists from renewing financing deals and liberating some of the 4.49 million tonnes of material in LME stores.



(Reporting by Nick Trevethan; Editing by Clarence Fernandez)