Copper falls on firm dollar, lack of Chinese buyers

LONDON, May 8 (Reuters) - Copper prices on the London Metal Exchange eased on Thursday as Chinese buyers were sidelined expecting lower prices and a firm dollar weighed on sentiment.

"We just don't see any reason for copper to rally from here. A lot of the negative news has been factored in so unless you get a further big supply disruption we see it drifting," analyst Max Layton at Macquarie Bank told Reuters.

Copper for delivery in three months was down $155 or 1.8 percent to $8,275 by mid-session, extending Wednesday's loss of 1.1 percent, as a stronger dollar made industrial metals more expensive for holders of other currencies.

"The stronger dollar and concern about sluggish nearby copper demand in China is overriding the impact of a possible Peruvian strike and low stocks holdings on the LME," analyst Edward Meir at MF Global said in a report.

The euro hit a two-month low against the dollar, but traders said the possibility of a strike in Peru could help to offset a firm dollar over the next few days. [ID:nN06491860]

Prices were slipping as Chinese buyers continued to buy hand-to-mouth and after a strike ended at top Chilean producer Codelco. Production was expected to resume on Friday.

However, underlying demand from China was still strong.

"They are just holding back as much as possible from purchasing in order to get the price down," Layton said, adding that Chinese demand would pick up at around $7,500 to $7,800.

The gap in prices between the London and Shanghai copper market narrowed to 4,676 yuan from 5,275 yuan on Wednesday, including Chinese value-added tax.

The spread hit a record 6,549 yuan on April 18.

"Historically when prices have diverged, the LME price tends to correct to the Shanghai price," Layton said, referring to falling prices on the LME narrowing the gap after prices rallied earlier this year to hit a record high of $8,880 on April 17.

So far this year copper has gained 26 percent on supply disruptions and tight inventory levels. Stocks in LME warehouses stand at 110,100 tonnes, down 44 percent this year.

Inventories could fall further, sparking a rally in copper with prices targeting $10,000 per tonne, analyst Allan Trench at metals consultancy CRU said.

"The key thing is that copper stocks would have to fall another 40,000 to 50,000 tonnes from where they are now -- that would be the real trigger," he said, adding it was likely as the market was structurally in deficit.

He compared the market to that of nickel, mainly used in stainless steel, where prices hit a high of $51,800 a year ago.

"Looking back to how the nickel market looked before that happened it looks very much like the copper market now," he said, referring to lukewarm signals from the physical market, demand growth slowing slightly and many consumers covered.

Since nickel peaked last year, prices have nearly halved to trade at $27,800, down $700 from Wednesday.

Substitution from nickel pig iron killed the nickel rally, but copper had no equivalent, CRU's Trench said.

In other metals, tin bucked the falling trend and was up at $24,400, after matching its record high of $24,600 set on April 24. On Wednesday it was last at $24,000/24,005.

The energy-intensive metal, aluminium fell $58 to $2,866 on record high oil prices, zinc shed $29 to $2,221, while lead was unchanged at $2,420.

Traders awaited the release of U.S. government data for initial jobless benefit claims at 1230 GMT and wholesale inventories at 1400 GMT for clues of about the U.S. economy. (Additional reporting by Alfred Cang in Shanghai; editing by Peter Blackburn)

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