Copper drifted lower on Wednesday as the market worried that prices had risen higher than the fundamentals justify, but expectations of stronger demand in the longer term and a weaker dollar limited the fall. Copper for three-month delivery on the London Metal Exchange closed at $6,415 a tonne, versus $6,480 on Tuesday and compared with a session low at $6,355.75 a tonne.
The metal, used in power and construction, hit its highest level in more than a week on Tuesday at $6,530 a tonne. "It (copper) is probably over-inflated for the time being," said Michael Khosrowpour, analyst at Triland Metals. "But I think the fundamentals in the picture going forward 12 months pretty much justify to see copper at least at $5,500-6,000 a tonne."
Copper has more than doubled since the start of the year as investment flows into commodities, restocking by China - the world's top consumer of the metal - and speculative buying have underpinned the price. Khosrowpour said the moves in the currency markets were another driver for industrial metals and a weaker dollar has helped copper's gains, making it cheaper for local currency holders.
But analysts have warned that weak fundamentals and rising inventory levels could result in sharp price corrections, while in the broader economy there were mixed signals. "The ability to shock markets is still there," said Robin Bhar, an analyst at Calyon. "People are on their toes - prepared for any shocks to come through - and that's perhaps why we're not seeing much fresh buying."
Highlighting weak demand, LME stocks of copper rose 1,250 tonnes to 316,800 tonnes, their highest level since May. Aluminium shed $7 to $1,888. LME stocks of the metal, used in transport and packaging, slipped 2,150 tonnes to remain near record levels above 4.5 million tonnes. Steel making ingredient nickel was down $100 at $17,950 a tonne, while battery material lead closed at $2,405, down $50 from Tuesday.
Zinc was unchanged at $1,980 a tonne and tin was last bid at $14,700/14,800 from $14,880. Looking at demand prospects, Baiyin Nonferrous Group Co Ltd, China's third-largest zinc producer and a major copper smelter, said it planned to more than double annual metal production capacity in three years. Investors in tin, used in electrical solder, remain concerned about the backwardation on the September-December 2009 period, which has seen September trade at a significant premium to December.