(13/04) Copper prices hit by Japan growth outlook

April 13, 2011

The contract for April delivery fell by 1.7% to $4.3775 a pound on the New York Mercantile Exchange on Tuesday, while the metal for three-month delivery on the London Metal Exchange shed 2.3% marking its biggest drop in over a month.

While prices rebounded slightly on Wednesday morning, they were still treading water and considerably below their previous highs.

The dampening in interest for the base metal followed the announcement that the International Monetary Fund downgraded its growth forecasts for Japan. It now expects the country to grow by 1.4% this year, down from the precious forecast of 1.6%, following the effects of the devastating earthquake, tsunami and nuclear crisis on its economy.

The Japanese government also lowered its assessment of the country's growth prospects, stating that "the economy is showing weakness due to the influence of the Great East Japan Earthquake".
"Markets were rattled by both the rise in severity of the Japanese nuclear situation to the same level as Chernobyl and concerns over crude oil price ascent and its impact on global economic growth," Barclays Capital analyst Nicholas Snowdon explained.

The softening in price comes in the same week that US banking giant Goldman Sachs advised investors to sell a basket of commodities, with a suggestion that the recent rally could be nearing an end.

"We believe that copper will face near-term headwinds as higher oil prices potentially translate into a negative demand shock for the metal and this commodity is exposed to supply chain problems resulting from the earthquakes in Japan.

"Copper also remains vulnerable to slowing observed demand as high prices and tight credit motivate tight inventory management from key consumer China, which tempers the inventory draw we had expected and the risk of price spikes," the bank's analysts said in a note.