Copper moved erratically in thin trade on Monday, tracking the dollar with worries about demand from China and the United States haunting the market. Financial markets in Shanghai and Hong Kong were closed and Australian players were also absent due to market holidays.
Copper for delivery in three months eased $20 to $7,980/7,985 per tonne at the end of the day after rising to $8,078 per tonne earlier. "The correlation between the dollar and commodities has become much more significant," said analyst Dan Smith at Standard Chartered.
With little news about market fundamentals, investors are focusing on dollar movements, which have an inverse relation with industrial metals prices. A weak dollar and fears over rising inflation are encouraging buying of commodities as a hedge.
"This is a dollar story," said Chief Investment Strategist Sean Corrigan at Diapason Commodities Management. "Metals got a boost in the last few days from the decline in the dollar and money being dragged back into index investments - alongside crude," Corrigan said. The euro rose to a high of $1.5845 against the dollar in the morning but slid 0.4 percent afterwards to around $1.5715.
Corrigan said copper would stay in a range between $7,600 and $8,500 for the next six months with few catalysts seen for the metal to break out from the levels established in mid-2006. "People have gradually become more pessimistic on the growth outlook - the United States is in a dire state and it is spreading to other regions," Corrigan said.
The US consumes around 15 percent of global copper production at an estimated 18 million tonnes per year. China absorbs about 25 percent of the metal, mainly used in the construction and power industries.
However, China's demand still not picking up is a key factor which caps copper prices. "The Chinese story is a significant negative. Our argument has always been that the price should not rally as long as Chinese demand is lacking," Smith at Standard Chartered said.
But, low levels of stocks signalling a tight market still offers support for copper. "Demand looks soft but supply disruptions are still lurking," A Societe Generale rsearch report said. Falling LME stocks underpinned sentiment, down 1,400 tonnes to 121,150 - just enough for 2.5 days of global consumption.
Chinese demand for copper and other metals could surprise on the upside this year after an earthquake hit the Sichuan region on May 12, leaving more than 80,000 dead or missing. "If China is going to have to rebuild a whole province presumable they are going to need more copper and steel and the like," Corrigan at Diapason said. Plus, looming supply disruptions could change the whole picture. In Peru, unions have delayed a nation-wide strike by around two weeks to June 30, to give Congress more time to debate a bill to lift caps on profit sharing. But in Australia, concerns are growing after gas supplies in Western Australia were cut by 30 percent.
Aluminium eased $5 to $2,952 a tonne, while tin was at $22,100 up from $22,000/22,100. Lead was at $1,958/1,960 a tonne, zinc gained $3 to $1,983, while nickel dropped $50 to $21,950.
Nickel prices are seen sinking below short-term support of $21,500 a tonne - opening up a test on much lower levels, investment bank MF Global said in a report. "We see $17,000 as the next technical target on the downside," the report said.