Shanghai copper prices fell 0.6 percent on Thursday after a 1.8 percent decline in London futures, but analysts remained positive towards base metals, citing falling stocks and firm demand. Shanghai July copper was at 72,720 yuan ($9,449) a tonne at Thursday's close, down from 73,190 at Wednesday's close.
"This is only a correction. It does not change the upturned in the market and I think copper is likely to climb above its record in the near future," said Wu Peeing, an analyst at Jinni Futures. "Copper inventories in London continue to fall, while we still see ample stock in China. The funds are playing a game and I believe they will win," he said.
Shanghai copper margins are set to rise half a percentage point to 6.5 percent from May 11's settlement. Dealers said that the increase would help the exchange mitigate against risk, but that is was too small to put much pressure on traders' credit lines.
Copper for delivery in three months on the London Metal Exchange was up $45 at $8,065 a tonne, clawing back parts of Wednesday's 1.8- percent loss. "As long as inventories keep falling, prices can go higher," analyst Michael Wider at Clayton said. LME stocks were 145,700 tonnes on Wednesday, down 3,675 from Tuesday and a third lower than in late January.
"My forecast for average copper prices in the second quarter is $8,200," he said. LME cash copper has averaged $7,857 so far in the second quarter and $6,497 since the start of the year. Credit Susses said copper had the potential to spike to over $11,900 a tonne sometime in 2007. On May 11, 2006, three-month copper futures hit a record $8,800 a tonne, while cash copper was $9,000.
"With European and US consumers now back in the market and supply disruptions returning as a theme, we are confident copper prices will stay strong in the second half," Credit Susses said in a report. Aluminium fell $9 to $2,876, after trading up to $2,927 on Wednesday before easing by the close. "There is a lot of open interest in aluminium options 17,000 calls for June at $2,900.
Those are in the money and the delta hedging is bringing other options into play," an LME dealer said. "But if the market starts to drift, the options boys will have to get out, so be prepared for an exciting ride over the next two or three weeks." Option granters cover their exposure against the risk of those options being exercised through delta hedging buying and selling the base contract as it appears more or less likely that those options will be exercised.
Nickel was at $49,400, up $105. Nickel ended $1,905 lower on Wednesday on profit taking after hitting a record high of $51,800. "Unless we see a significant restocking or cuts in stainless production, prices will remain high," Clayton's Wider said. "We see the market in deficit. I am forecasting average nickel prices at $50,000 a tonne next year."