BASE METALS: LME Copper Up In Asia; China Consumer Buying

London Metal Exchange copper prices rose in Asia following reports of Chinese consumer buying picking up and a production cut at Grasberg in Indonesia, the world's second largest copper mine.

Prices rose to an intraday high of $6,940 a metric ton, up 1.5% on the Wednesday afternoon kerb, before paring back to trade around $6,910/ton.

Freeport-McMoRan, operator of the giant Grasberg copper-gold mine, said Wednesday a "small-scale" incident would defer mining of about 68,000 tons of copper into next year.

According to data on Comex, market participants are net short, meaning they're betting that prices will fall, in reaction to bearish economic news that has sparked deleveraging across the commodity complex.

However, a net short position can also produce a powerful rally, should news such as a strike or other unforeseen production cuts prompt prices to firm.

In another positive development, copper's drop to a seven-and-a-half-month low has pushed LME copper to a discount against copper on the Shanghai Futures Exchange, and should encourage Chinese copper imports to recover substantially during the fourth quarter, said Macquarie Bank.

China domestic physical copper is trading at a large premium of $360/ton above the LME cash copper price, compared with an $800 discount back in May 2008, Macquarie said.

"End-user destocking has finished, and the arbitrage is getting better and better," said a physical dealer in Shanghai, who expected copper imports to rebound after August data showed a 4% month-on-month drop, which he said was "down to Olympics and factory closures."

But "beyond November, the negative outlook for the U.S. and elsewhere is likely to weigh," he added.

The economic backdrop for base metals remains bearish, and the euro dropped to a one-year low below the $1.40 mark as investors reacted to slowing economies outside of the U.S.

"When you look at the bigger picture, everything outside China is slowing quite sharply. We could get a mild bounce on industrial activity in China rebounding after the Olympics, but I wouldn't get my hopes up," said ANZ Commodity Strategist Mark Pervan.

LME aluminum, which has dropped some 21% since the July peaks, was slightly down, but Macquarie said with nearly half of China's producers struggling to make a profit at current SHFE prices, it was "hard to be bearish on aluminum from here."

While it's too early to predict production cuts because of the considerable expense of shutting down aluminum cells, it will delay commissioning of new capacity, and that could ultimately tighten supply and boost prices.

"Overall, we think that if aluminum prices stay at current levels, that will limit the startup of new smelting capacity in China," the bank said in a note.

At 0638 GMT, LME copper traded at $6,900/ton, up $60.50, while aluminum was down $11 at $2,615/ton.

Zinc was unchanged at $1,746/ton, lead was up $5 at $1,804/ton, nickel was up $25 at $18,500/ton and tin was up $300 at $18,600/ton.

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