Copper Declines as Inventory Increase Signals Demand Weakness

By Anna Stablum

July 6 (Bloomberg) -- Copper fell in London and New York as inventories continued to rise, signaling softer demand, and the dollar advanced.

Stockpiles in warehouses monitored by the London Metal Exchange, which declined for 40 straight sessions through July 2, gained for a second day. The U.S. Dollar Index, a gauge of the greenback’s value against six other currencies, rose as much as 0.6 percent, making dollar-priced commodities costlier for holders of other monies.

The drop “is a combination of rising stocks, a feeling perhaps that the summer slowdown is with us now and moves in the dollar,” said Alex Heath, head of industrial metals trading at RBC Capital Markets in London.

Copper for September delivery lost 3.9 percent to $2.2155 a pound at 8:50 a.m. on the New York Mercantile Exchange’s Comex division. Copper for three-month delivery fell $109, or 2.2 percent, to $4,871 a metric ton by 1:34 p.m. on the LME. The contract slid 1.1 percent last week as government figures showed the U.S. jobless rate climbed to the highest since August 1983.

“You have had this change in sentiment, with the gradual realization that unemployment levels are rising and that this recession is going to run longer,” Heath said by phone.

Inventories of copper in LME-monitored warehouses rose 900 tons to 269,175 tons. Metal earmarked for delivery has declined to 4.8 percent of total stockpiles from 21 percent at the start of May. Stockpiles in Shanghai gained 6.9 percent to 59,980 tons last week, the Shanghai Futures Exchange said on July 3.

More Investment

The increase “puts pressure on the market,” Heath said. “In the short term, higher stocks are likely to continue.”

Lower stockpiles helped copper to jump 58 percent on the LME this year, rebounding with other industrial metals from plunges in 2008. In turn, rising prices helped to draw investors back to raw materials. Commodity assets under management rose $34 billion in the second quarter from the prior three months, Barclays Capital said July 2.

Fund inflows supported copper’s price “well above the marginal cost of production,” Jim Lennon, an analyst at Macquarie Bank Group Ltd. in London, said in a report today. He predicted slower Chinese imports of copper in July and August, citing a narrowing gap between prices of the metal in the London and Shanghai markets.

“Traders will lose about $100 a ton of copper imported into China, compared with receiving $300 a ton of profit in early 2009,” Lennon said. Along with a seasonal slowdown in Chinese domestic demand, this is likely to push the metal’s prices down by 10 percent to 15 percent in the current quarter, Lennon said in the report.

Chinese Imports

China’s fixed-asset investment growth is expected to slow, implying “a significant reduction in copper imports,” Michael Lewis, an analyst at Deutsche Bank AG in London, said in a report today. China now has excess copper inventories amounting to between 700,000 and 1 million tons after imports more than doubled so far this year, the bank said.

“Chinese GDP growth is set to slow from 13 percent in the second quarter of 2009 to under 5 percent by the first quarter of next year,” Lewis said in the report. Deutsche Bank predicted average prices for copper for immediate delivery of $4,197 a ton this year and $4,420 in 2010.

Among other LME metals for three-month delivery, aluminum slipped 1 percent to $1,585 a ton. Nickel fell 4.6 percent to $15,460 a ton. It reached $16,600 on July 1, the highest intraday price since Sept. 29. The metal, used in stainless steel, rose 56 percent in the second quarter.

“We believe prices already discount a strong recovery in the demand for stainless steel,” Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt, said in a report today.

Lead eased 3 percent to $1,658 a ton, zinc declined 2 percent to $1,520 a ton, and tin was 1.2 percent lower at $14,225 a ton.

To contact the reporter on this story: Anna Stablum in London at astablum@bloomberg.net