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China copper: Play defensive for long holiday

SHANGHAI: China's copper market was building a defence against price volatility on overseas exchanges by reducing futures exposure and building stockpiles ahead of a 10-day holiday period, analysts and traders said.

The Shanghai Futures Exchange will be closed for the lunar new year holiday from February 3, and trading will resume on February 14.

"We have asked our clients to put more margin deposits," an analyst with a Shanghai futures brokerage. "Or we advise them to close out some positions."

During the long holiday recess last year, a sharp fall on the London Metal Exchange (LME) copper threw Shanghai into turmoil, thrusting futures down the daily trading limit as soon as the local market reopened.

As long as "exchange for physical" (EFP) was not allowed under the trading rules of the exchange, there was no effective way to hedge the price risk, the analyst said.

But chastened by last year's experience, almost all major players on the Shanghai exchange had formed alliances with LME brokers to get up-to-the-minute information of the market, traders said.

Under normal circumstances, traders expected London copper to weaken somewhat in the absence of Asian participation, which tended to pile on the long side, a trader said.

But with the alliances, London brokers were likely to buy at the lows on behalf of the Asian counterparts, he said.

"If the arrangement works well, we don't expect a lot of volatility," the trader said.

UPSIDE SEEN LIMITED

And what if the copper bull charges ahead while Chinese usher in the Year of the Dragon?

The prospect did not seem to worry China's copper consumers, who were taking comfort in rising stocks and their long-term contracts with foreign producers, trade sources said.

Last week, Shanghai Futures Exchange warehouse stocks rose 11,103 tonnes to 79,815 tonnes, after a 3,593-tonne buildup in the previous week.

"There will be plenty of copper around for fabricators to draw from," a trader said.

LME copper stocks, despite a 2,175 tonne fall on Monday, were still near all-time highs.

TECHNICAL RANGE TO HOLD

A technical analyst said LME copper was likely to meander in the near term around $1,900, which marked the half-way level between its recent year high of $2,400 and low of $1,400.

"We don't see a lot of momentum to head to $1,920," he said.

The analyst said the lack of a speculative spark in copper had kept overseas copper prices subdued.

If the U.S. Federal Reserve raises interest rates this week, the higher cost of money could further depress fund participation, he said. The Fed is widely expected to raise interest rates by 25 basis points at its two-day meeting, which starts on Tuesday.

The analyst said that until recently copper's surge was partly fuelled by rising oil prices, but the two appeared to have decoupled.

If the cold temperature in the northern hemisphere boosted heating oil consumption and crude oil prices, the same weather factor and rising energy costs would be negative for copper consumption, he said.-Reuters