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Copper prices hit 5-1/2 month lows on Wednesday, coming under pressure from deteriorating demand prospects in top consumer China, climbing inventories in London Metal Exchange (LME) approved warehouses and a higher dollar.
Traders said profit taking on short positions – bets on lower prices – later helped copper prices to recover.
Benchmark copper CMCU3 on the LME was up 1.2% at $8,200 a tonne at 0955 GMT. Prices of the industrial metal used as a gauge of economic health earlier hit $8,088.50, the lowest since Nov. 30.
“There is some short covering going on, but the demand picture is weak,” said Robert Montefusco, a broker at Sucden Financial, adding that base metals were reacting to macro factors such as U.S. interest rates and the dollar.
The latest data to reinforce the weak outlook for base metals was China’s industrial output, which rose 5.6% in April from a year earlier, up from 3.9% in March, but below the consensus 10.9%.
Copper stocks in LME warehouses at 86,625 tonnes have risen 70% over the past four weeks to their highest since January.
The risk of a U.S. debt default and safe-haven buying, and traders cutting bets on imminent cuts to U.S. interest rates by the Federal Reserve, boosted the dollar.
A rising U.S. currency makes dollar-priced metals more expensive for holders of other currencies, which would subdue demand.
In the aluminium market, focus was on a large holding of LME warrants and a short position holding 20-29% of open interest – the number of outstanding contracts due to mature or be rolled over at settlement.
Expectations the short position may have to be squared has created a premium for buying aluminium tomorrow and selling it the day after – known as tom-next.
The premium jumped to $11.30 a tonne on Tuesday, the highest since April 14 and was last at $8.
Three-month aluminium CMAL3 was up 0.8% at $2,278.