Shanghai copper edges lower, eyes on LME aluminium

Shanghai copper prices fell almost 1% in light trade on Tuesday and turnover was also thin for most London Metal Exchange contracts as business slowed ahead of the year-end holidays.

The aluminium market was also slightly softer, but the expiry of December options in London and the likelihood of the return of Chinese consumers after the New Year could make for volatile conditions, dealers said.

Chinese copper futures prices slipped, with the most active February contract shedding 570 yuan to end the morning session at 64 770 yuan per ton.

"Shanghai copper is forecast weak with light trading volume in both cash and futures markets," said Jiang Zhengyu, a trader at Zhejiang Hailiang Group, a major copper pipe maker in eastern China.

"In my experience, December is not a low season for spot trading, but I feel the market has lost momentum now," he said.

Cash copper in eastern China ranged between 66,250 yuan to 66,650 yuan, down 400 yuan a ton from the previous day.

Copper for delivery in three months on the London Metal Exchange was at $6 990 a ton by 0345 GMT, against $7 000 at the London kerb close.

Aluminium edged slightly lower to $2 805 from $2 812 at the close in London on Monday, when the contract hit a three-week high of $2 835, boosted by option expiry for December on Wednesday.

The expiry of December options, when holders can exercise their right to buy or sell the underlying future, has become the focus of attention as one market participant is estimated to be holding between 50 and 80 percent of the available stock in aluminium.

"This situation has created a sense of nervousness in the short-term aluminium market as that large position could either move forward or be brought to delivery, effectively squeezing the market," said Peter Richardson, Deutsche Bank's chief metals economist in a daily note.

"A December squeeze is not an uncommon event this time of year as it has occurred often as the Christmas slowdown period approaches." Tightness eased slightly with the premium for cash metal above the three-month price at $1,80/$3,80, from $10 on Monday.

Last week, cash metal was trading at a discount of $20,50 to the benchmark futures contract.

The most active February Shanghai aluminium futures contract closed the morning session a touch weaker at 20,260 yuan a tonne, compared with Monday's close of 20 300 yuan.

"Aluminium in Shanghai is expected to stay relatively quiet until early next year, when increasing purchases by Chinese end-users may fuel the domestic market," said Li Rong, an analyst at Great Wall Futures in Shanghai.

Zinc ticked up to $4 460 per ton from $4 445 in London, while other base metals were untraded.