US copper futures ended up but off their session highs on Friday after a surprise rate cut by the Federal Reserve provided some short-term stability, but this week's damage could signal further downside risk next week, analysts said.
"Based on what we've seen, copper is telling us that we're headed for tough times. Significant technical damage was done to the contract this week and I believe you'll see further downside price action out of that contract going forward," said Zachary Oman, senior trader with Wisdom Financial in Newport Beach, California.
At the Comex division of the New York Mercantile Exchange, copper for September delivery settled up 5.65 cents, or 1.8 percent, to $3.1465 a lb., after dealing from low of $3.07 and trading as high as $3.2075, following the Fed.'s interest rate cut.
The Federal Reserve cut its primary discount rate, which governs direct loans from the central bank to commercial banks, to 5.75 percent from 6.25 percent, saying that downside risks to US economic growth had risen "appreciably."
Copper, an industrial metal with close ties to the health of the underlying economy, has been in a recent tailspin, dropping to a 4-1/2-month low of $3.0410 a lb. On Thursday on fears that the credit crunch may have a significant impact on economic growth, and with it, demand for raw materials.
"Right now, Copper is strongly tied to the economy, both foreign and US as well, and as the supreme issue and the fall-out from this week's price action filters into the market, I expect more downside through years end at least," Oman said.
Bart Melek, Global Commodity Strategist with BMO Nest Burns in Toronto, echoed that point, saying that just because the Fed had taken a small step towards easing monetary policy, the markets were not out of the woods just yet.
"Markets need to be stable for a while and their needs to be some supportive economic data and less hawkish talk from the ECB (European Central Bank) as well, before bullish sentiment can reign supreme," Melek said.
Final estimated copper futures volumes totalled 24,424 lots, down from Thursday's official count of 39,651 lots. As of August 16, open interest in Comex copper futures fell 524 lots to 75,655 contracts. Overnight inventory data showed another large build in London Metal Exchange (LME) copper warehouse stocks, up 1,200 tonnes to 120,550 tonnes on Friday.
Comex copper stocks held steady at 21,244 short tons, while weekly stock data from the Shanghai Futures Exchange saw levels fall 158 tonnes to 89,810 tonnes. On the fundamental front, Peruvian workers at Southern Copper, one of the world's top copper producers, have rejected the company's wage hike proposal, a union leader said on Friday.
Workers at the Cajon mine rejected the offer late on Thursday, following rejections this week by workers at the company's Ilo smelter and Toquepala mine. Meanwhile, talks aimed at bringing an end to a three-week strike at Group Mexico's massive Cananea copper mine will begin on Monday. London Metal Exchange copper for delivery in three months jumped almost 5 percent to $7,060 a tonne before ending the session at $7,020, up $270 from Thursday's close.