(Reuters) - London copper futures fell on Wednesday as Chinese traders returning from a long holiday weekend sold off the metal, concerned current prices are too high given a blurry outlook for demand.
Also weighing on sentiment, China's manufacturing sector shrank for the sixth month running in April, according to a private-sector survey that showed a continued divergence between China's larger, predominantly state-owned enterprises and smaller, private firms.
Shanghai copper prices opened firmer when Chinese markets reopened on Wednesday after a two-day public holiday, hitting three-week highs, before trimming gains.
They're just bearish, those traders sitting in China. They think the (LME) price is too high for the current environment, said a Singapore-based trader.
And with the arbitrage window between LME and Shanghai copper staying firmly shut, with the LME premium at nearly $500 per tonne over Shanghai, there's zero appetite out of China at the moment to buy LME copper and the shorts just continue to pressure it, he said.
Chinese consumers are worried about China's economy and are definitely not looking to restock copper from the LME when prices are at a premium to local stocks, which are piled so high, said China Futures Co analyst Yang Jun in Shenzhen.
Three-month copper on the London Metal Exchange fell 0.6 percent to $8,386 a tonne by 02:26 a.m. EDT (0626 GMT), its second drop in three sessions.
The most active August copper contract on the Shanghai Futures Exchange was up 0.6 percent at 58,830 yuan ($9,300) a tonne, near its session high of 58,950 yuan, its loftiest since April 10.
London copper hit a near one-month top of $8,496.75 on Monday, and traded not too far off that level on Tuesday amid a broad-based rally in risk assets fuelled by data showing U.S. manufacturing activity hit a 10-month high in April. That renewed belief in the world's top economy where recent data had raised worries about sputtering growth.
The strong U.S. factory number came after a similarly positive China purchasing managers' index that stood at a 13-month high.
LME BACKWARDATION EASES
The premium of LME cash copper over three-months material eased to $97 on Tuesday after shooting up to $149 a tonne on Friday, the biggest since early August 2008. The drop indicates less tightness in immediate supply.
With this backwardation down, there is less need for shorts to roll over to the third month and close out their positions - a move that helps push three-month prices up. Also, the rate of warrant cancellations has slowed, and this is less supportive of LME copper prices as well, said a Shanghai-based trader.
Some market players said they expect the LME cash-to-three-months backwardation to continue easing after large Chinese copper smelters announced they will deliver copper into LME warehouses.
A lot of these big Chinese producers were among those caught in the current squeeze, and since they have so much metal, delivery into LME warehouses is more cost-effective to them. The only thing that can hold them back would be the amount they can export under their state-assigned licences, said the Shanghai-based trader.
You can't expect them to take this squeeze situation lying down. They are bound to come up with countermeasures. Given the clouts of the parties involved, it's exciting times ahead, he added.
In industry news, China's Minmetals Resources (1208.HK) said on Wednesday its 60,000 tonnes-per-year copper mine in Democratic Republic of Congo would fall short of production targets due to power disruptions.
($1 = 6.3102 Chinese yuan)
(Editing by Himani Sarkar and Chris Gallagher)