Copper fell on Friday after manufacturing data from China showing a lacklustre start to the year reduced expectations of demand from the world's top consumer of the metal, with a weak euro putting further pressure on prices. Three-month copper on the London Metal Exchange (LME) closed at $8,225 a tonne, down 1.6 percent from a last bid of $8,360 on Thursday. Earlier it hit $8,428.50, its highest since September 20. Prices are up around 3.5 percent this week, a second week of gains.
China's manufacturers started 2012 in a sluggish mode, suggesting Beijing will keep pulling pro-growth policy levers, despite some early signs that a downward drift in factory activity is slowing, a survey of purchasing managers showed on Friday. Looking ahead into next week, analysts expect trading activity to be subdued due to the week-long Lunar New Year holiday in China. "I expect to see sideways trading next week because of the Lunar New Year, given that China is one of the major markets for base metals," said Peter Fertig, a consultant at Quantitative Commodity Research.
"On the other hand, we still have developments in the euro zone which could lead to some surprises. But it seems to be the case that the tensions in the euro zone are calming down a little bit." The euro fell from a two-week high against the dollar on Friday as investors locked in profits from this week's rally, wary about the outcome of Greek debt negotiations, although there were growing expectations about a deal.
A strong dollar makes commodities priced in dollars more expensive for holders of other currencies. Supply constraints and dwindling inventories of copper have helped underpin the price of the metal, however. Copper inventories monitored by the LME fell to their lowest since October 2009, data showed on Friday.
"There is no doubt a problem with copper supply. You've had results from the major corporates this week showing continued problems into Q4. So this year we're going to see modest demand growth against a backdrop of pretty poor supply growth," analyst Dan Smith of Standard Chartered said. Global diversified miners Rio Tinto and BHP Billiton both reported lower copper production in the fourth quarter.
A positive week of news around Europe's debt crisis and signs the US economy is recovering have underpinned overall sentiment in financial markets. Sales of previously owned US homes rose to an 11-month high in December, and the supply of properties on the market dropped to a near seven-year low, an industry group said on Friday. Aurubis, Europe's largest copper producer, said it expected robust results this year, with strong demand from China, which accounts for 40 percent of global consumption of the metal.
A third straight monthly fall in Chinese house prices in December could add to concerns in several key metal markets, but the world can still bank on sustained and long-term demand growth from the second-biggest economy. "Market sentiment is clearly positive and the sector benefits more than other markets from the improvement in funding conditions due to its capital intensity," Credit Suisse said in a research note. "However, we would warn that there are still some risks in the near term. Inventories in China are rising, which hints at moderating demand, at least temporarily."
In China, warehouse inventories monitored by the Shanghai Futures Exchange rose 9.3 percent from last Friday, the exchange said. In other metals, tin was at $21,850 from $21,900, while zinc slipped to $2,012 from $2,030, and lead traded at $2,184 from $2,183. Aluminium was at $2,215 from $2,232, while nickel was at $20,450 from $20,200.
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