Copper Drops in New York on Concern About Outlook for Chinese Real Estate

Aug 5, 2010 - Copper fell in New York and London on concern about the outlook for the real-estate market in China as the government assesses the risk of a possible property-price slump.

China’s banking regulator told lenders to include worst- case scenarios of prices dropping 50 percent to 60 percent in cities where they have risen excessively, a person with knowledge of the matter said. The country is the world’s biggest copper user. Construction accounts for a quarter of demand, according to the Copper Development Association.

Industrial metals were “weaker overnight on worries over the Chinese bank stress tests,” David Thurtell, a Citigroup Inc. analyst in London, said by telephone.

Futures for September delivery fell 2.65 cents, or 0.8 percent, to $3.378 a pound at 8:02 a.m. on the Comex in New York. The contract yesterday reached the highest intraday price since April 29. Copper for delivery in three months declined 0.7 percent to $7,455 a metric ton on the London Metal Exchange.

Prices also slid as orders to draw copper from stockpiles declined for a second day. “It’s the seasonal weak spot for consumption,” Thurtell said.

Chinese regulators have tightened real-estate lending and cracked down on speculation since mid-April, after residential real-estate prices soared 68 percent in the first quarter from a year earlier, according to estimates from Knight Frank LLP.

Demand Growth

Measures to prevent overheating in China are a “good thing to happen,” Rodrigo Toro, corporate senior sales vice president at Codelco, told reporters at the World Expo in Shanghai. They will cap China’s annual demand growth at 8 percent and may keep it at that rate in coming years, he said. Santiago-based Codelco is the world’s largest copper producer.

Canceled warrants, as the orders are known, tracked by the LME dropped 4.8 percent to 28,500 tons, daily exchange figures showed. Warrants are down 13 percent this month after falling 5.5 percent in July.

Copper stockpiles shrank for a second day, slipping 0.2 percent to 413,075 tons. They declined 8.3 percent in July, the most since June 2009, and are down 18 percent this year, on course for the first annual drop since 2004.

Aluminum for three-month delivery on the LME dropped 0.3 percent to $2,222.50 a ton. The contango, cash metal’s discount to the three-month contract, widened to $10.50 a ton yesterday from the prior session’s $10.25, according to LME data. It reached $10 on Aug. 2, the narrowest level since March 23, 2007.

Shift to Backwardation?

“It’s looking increasingly likely that the market could move into backwardation,” Gayle Berry, an analyst at Barclays Capital, said by e-mail yesterday, referring to a premium for cash metal to the three-month contract. “Limited availability of spot metal due to the strong recovery in demand, tight scrap supply and a lot of LME metal being tied up in financing deals” lie behind the shift, she said.

An estimated 70 percent of LME aluminum inventories are tied up in financing transactions, according to Mitsui Bussan Commodities, the industrial-metals trading arm of Mitsui & Co. Stockpiles of the lightweight metal in LME warehouses have dropped 4.9 percent this year to 4.40 million tons.

“I don’t think that financing deals will be broken en masse,” Berry said. “That would require a much tighter spread, especially since further out on the curve there is still a decent contango.”

Higher prices for longer-dated contracts give more scope to profit by buying physical metal and selling futures, provided financing, insurance and storage costs are less than the price difference between corresponding futures.

Tin, Nickel

Tin rose 1.3 percent to $20,560 a ton. The metal, mainly used in electrical soldering, climbed as high as $20,698, the highest intraday price since Aug. 27, 2008. LME inventories dropped to 14,715 tons, the lowest level since June 1, 2009.

A single party holds between 50 percent and 79 percent of stockpiled LME metal, according to exchange data as of Aug. 3. That was up from between 40 percent and 49 percent on July 27.

Lead fell 0.9 percent to $2,222 a ton and zinc slipped 0.1 percent to $2,118 a ton. Nickel gained 0.7 percent to $22,100 a ton after reaching $22,139, the highest since May 24.

source: www.bloomberg.com