Copper steadied on Tuesday as fears eased over the possible unwinding of financing deals using the metal as collateral in China but the country's slowing economy still worried investors and subdued gains. China is the world's top user of copper, with at least half of its monthly imports used as collateral by Chinese traders who get US dollar loans, sell the metal in the domestic market and raise capital for investment in assets such as real estate.
The country's first domestic bond default triggered fears of a crackdown on credit risk and the shadow banking sector that is at the heart of the financing deals. Those fears have since receded as there have been few indications of large-scale selling of physical copper in China, analysts said.
Benchmark three-month copper on the London Metal Exchange ended at $6,483 a tonne, up just 0.1 percent from Monday's close, having earlier risen to an intraday high of $6,570 a tonne, the highest since March 11. The contract hit $6,376.25 on March 12, its lowest since July 2010.
"We saw the market get severely oversold in the last week or so and some of those fears have abated, and the market should find a good base here," Societe Generale analyst Robin Bhar said. In a note last week Barclays said there were few signs of a fire-sale of physical copper in China after the credit problems. "Trading house sources we spoke with indicate that while dropping prices would force the closeout of long hedges, exacerbating the drop in prices, there have been few signs of large-scale physical selling," Barclays analysts said in a note.
"The mainstream mechanics of copper financing mean that the parties involved do not face immediate pressure to sell physical stocks," they said. Besides the default and concerns about debt in China, investors are still worried about soft economic data, weak demand and rising copper inventories in warehouses. Short-selling on a bearish outlook for copper, given China's slowing growth, has left the market vulnerable to a technical rally as shorts close out positions, industry sources said.
"Certainly short-covering has been a dominant factor recently considering the extent of the fall," said Mark Keenan, analyst at Societe Generale in Singapore. In the Belgian port of Antwerp, 20,675 tonnes of metal flowed into LME-registered warehouses, LME data showed on Tuesday, causing a flutter of concern in the metals market. Bhar said the inflow probably had little to do with a lack of demand. "I think this is a one-off, a short has elected to deliver, that would be the best guess," he said.
The weakness in base metals also reflected caution in wider financial markets because of the stand-off over Crimea and a US Federal Reserve meeting starting later on Tuesday. Ukraine's mainly Russian-speaking region of Crimea voted overwhelmingly in a weekend referendum, condemned by Western states, in favour of joining Russia. "We suspect that the Russian situation will fade a bit, as investors turn their attention to the Fed policy statement out tomorrow," said Ed Meir, analyst at INTL FCStone. "The relatively strong (factory activity) data, coupled with a fairly decent employment picture, should encourage the Federal Reserve to keep its tapering program intact, but growth in the first quarter is still expected to be quite a bit weaker than it was in the final three months of last year."
LME three-month nickel broke through $16,000 a tonne for the first time in 11 months. It ended at $16,190 a tonne, up almost 2 percent from Monday's close, having earlier touched its highest since mid April. The metal has been supported by supply concerns due to an export ban on shipments from Indonesia, the world's top supplier of nickel ore. The World Bank warned on Tuesday that the ban would hit trade and government revenue and risked undermining already weak investor sentiment towards Southeast Asia's biggest economy. Tin ended at $23,170 a tonne, up 0.85 percent from Monday's close, lead closed at $2,069.50, up 0.5 percent, zinc ended up 0.7 percent at $1,979 and aluminium was up 0.7 percent at $1,736.