Copper under pressure on higher US dollar

02 January 2017

Copper prices were softer on Thursday alongside equities in thin holiday trade as markets fretted about the higher dollar and the potential for a liquidity crunch in top consumer China.

Benchmark copper on the London Metal Exchange ended 1 per cent down at $US5,487 a tonne, though still up from last week’s one-month low of $US5,419.50.

But copper is on course for a gain of about 17 per cent this year, which would be the first annual rise since 2012, mainly owing to better than expected demand in China and hopes of rising demand resulting from U.S. spending on infrastructure.

Much of that increase was because of buying by funds, many of which have been cutting bets on higher prices in recent weeks, partly because of the dollar’s climb to 14-year highs against a basket of major currencies.

A higher U.S. currency makes dollar-denominated commodities more expensive for non-U.S. firms. For China, it means a weaker yuan, capital outflows, potentially slower economic growth and liquidity stress in money markets.

“I would be reluctant to over-interpret these markets in this quiet holiday period, but there are a couple of key drivers: the strong dollar and stress in China’s financial markets,” said Danske Bank analyst Jens Pederson.

Copper broke above $US6,000 a tonne in November after Donald Trump won the U.S. presidential election and boosted hopes of infrastructure spending and higher consumption.

But the United States accounts for only about 8 per cent of global demand estimated at about 22 million tonnes and focus has returned to China, which accounts for nearly half.

Also worrying traders was the potential fallout from Japanese tech-to-nuclear conglomerate Toshiba, shares in which have slumped since it announced this week that it faces a potential multibillion-dollar writedown.

“The problem is the potential for contagion into other equity markets, which inevitably would be felt in commodity markets,” one copper trader said.

Aluminium closed 1.5 per cent down at $US1,679, zinc fell 2.3 per cent to $US2,521, tin rose 0.8 per cent to $US21,050 and nickel was up 0.1 per cent at $US10,120.

Lead lost 2.9 per cent to $US1,970, having earlier touched a three-month low at $US1,960 as funds cut bets on higher prices.

Source – News AU