Shanghai copper rallied nearly four percent on Monday after China's factory activity shrank in April, boosting bets Beijing would take further easing steps, and as markets reopened after a long weekend. China's factories last month suffered their fastest drop in activity in a year, as new orders shrank, a private business survey showed on Monday, hardening the case for fresh policy stimulus to halt a slowdown in the world's second-largest economy.
"I think the market will probably take it positively in that it will be a further reason to increase liquidity and also raises the spectre of further RRR cuts or other supportive measures," said ANZ analyst Daniel Hynes in Sydney, referring to cuts to banks' reserve requirement ratio in China. The most-traded July copper contract on the Shanghai Futures Exchange soared by 3.7 percent to 45,710 yuan ($7,328) a tonne by 0712 GMT.
The most active ShFE nickel contract also rallied by 3.4 percent as shorts rushed to cover. "There is still localised demand for nickel warrants from LME warehouse with some clients reporting a slight pick-up in enquiries from Asia in recent days," said broker Triland in a note The London Metal Exchange was closed on Monday for a bank holiday. LME copper chalked up more than 6 percent gains last week, for its biggest weekly advance since December 2011.
Hedge funds and money managers upped their bullish bet in copper futures and options during the week ended April 28. Speculators raised their copper net long position by 327 lots to 13,923 lots, the data showed. April commodity rallies in base metals were in part fuelled by a weaker dollar, and took place despite worsening fundamentals, said INTL FC Stone in a research note.
"We are seeing only modest supply side reductions and in some sectors, output is actually increasing. Moreover, despite the government's best efforts, Chinese metals demand remains slack and the export markets continue to act as a safety valve for excess production for many of the metals," said the note. US factory activity failed to gain steam in April after slowing for five straight months and demand for automobiles softened, suggesting the economy was struggling to find momentum after growth almost stalled in the first quarter. A fall in China's demand for physical zinc metal to its weakest in two years has raised concerns that a six-week rally in London forwards prices has overshot fundamentals and could unwind.