SHANGHAI (Dow Jones)--China's latest move to curb inflation won't cloud the outlook for domestic copper demand in the first quarter due to manufacturers' healthy export order books and traditional restocking after the Lunar New Year holidays, industry participants said Wednesday.
Continued buying enthusiasm in the markets of the world's largest metal consumer will likely keep sentiment buoyant in global copper markets, although the price of three-month copper on the London Metal Exchange came off Monday's all-time high of $10,160 a metric ton after Beijing raised interest rates overnight.
However, concerns over financial-system liquidity and the pace of physical restocking may keep gains in domestic copper prices in check, which would keep the window for arbitrage opportunities between London and Shanghai--an important driver of copper imports--firmly closed.
"I don't see copper demand being dampened (just due to the interest rate increase overnight) in the short term, because it had been widely anticipated before the holiday, and more importantly, downstream demand is pretty solid," said a trading manager at a major brokerage.
Manufacturers have reported "positive" order books for the first quarter thanks to steady demand from Europe and Africa, he said.
"Restocking is happening in spite of higher copper prices, not just because there's a need to do so, but also producers feel that they can pass on higher cost to their customers," he said.
Continued government spending in rural power networks this year will also boost demand for the red metal, analysts said.
A Shanghai-based trader said spot sales were relatively light Wednesday, as most market participants haven't returned from the holiday yet.
"We're definitely going to see buying starting next week, but probably at a lower speed this year because of higher copper prices," the trader said.
Slow-moving copper prices in the domestic market may make a re-opening of arbitrage trade between Shanghai and London quite difficult till at least the end of the first quarter, as many market participants are still concerned that the government will take further monetary measures to combat inflation, traders and analysts said.
"Monetary tightening has a lot more leverage on trading houses (than on real copper consumers) as they are the main force in the arbitrage trade, so uncertain macroeconomic conditions just render them ultra-cautious in making bets. Most of them just do short-term speculation, such as on a two-to-three-day basis," the trading manager said.
More rate hikes are expected this year, with Barclays Capital analysts forecasting increases of another 75 basis points by the end of 2011.
