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China's release of national copper reserves not a game-changer for price rally - analysts

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(Kitco News) - Copper prices have been taking a hit, falling to a two-month low after China announced that it would sell its strategic reserves of the base metal to cool down what has been a hot market.

However, some commodity analysts expect that lower prices will prove to be a new buying opportunity as China's move does nothing to change the supply and demand fundamentals. Many analysts see the copper market in a supply deficit for at least the next three years as it will take time to bring new supply into the market.

"Short-term, this is a way to dampen prices and push speculators out of the market, but long-term investors will see this as a buying opportunity," said Phillip Streible, chief market strategist at Blue Line Futures. "We still see strong demand for copper, and we think it still remains a great inflation hedge."

Following days of rumors, Tuesday, the Chinese government announced that it would release supplies of copper, aluminum, and zinc in batches to nonferrous processing and manufacturing firms via public bidding. However, the National Food and Strategic Reserves Administration did not provide a specific amount it would release for each metal.

The news has dragged the copper market down 3% so far this week as prices dropped below critical support at $4.50 a pound. July high-grade copper futures last traded at 4.385 a pound.

While copper prices could continue to fall further in the near term, Sean Lusk, co-director of commercial hedging at Walsh Trading, said that he also remains bullish on the base metal.

"This is a bullish story in the long-term," he said. "Ultimately, these reserves will have to be replenished, and they will have to be replenished as supply continues to tighten," he said.

"I would be careful shorting copper because of this news out of China," he added. "Demand for copper is growing, and the scarcity issue won't be resolved with China's strategic reserves."

Lusk added that instead of China, he is paying more attention to the Federal Reserve, which is set to announce its monetary policy decision this afternoon. Lusk said that although inflation is rising, he expects the U.S. central bank to strike a dovish tone in its statement.

"The government continues to spend money it doesn't have, so how can the Federal Reserve look to tighten interest rates anytime soon," he said. "We are going to see continued commodity demand across the board as the Federal Reserve keeps interest rates low."

Mike McGlone, senior commodity analyst at Bloomberg Intelligence, said that that he also doesn't think China releasing its strategic copper reserves is a game-changer for the market.

He added that China is proving the old adage: "The cure for higher commodity prices is high prices."

"Markets rarely just go straight up, or down, and a normal mean reversion, pull-back could get copper to around $8,000 and mean little in the bigger picture recovery," he said.

McGlone added that while everyone is watching copper, investors also need to keep an eye on equity markets as that could significantly impact prices.

"If we get a bit of reversion in equities, say 10%, copper and crude are more likely to drop about double the velocity," he said.

Colin Cieszynski, chief market strategist at SIA Wealth Management, said that although copper prices have dropped below $4.50 and its 50-day moving average, the selloff has not damaged the market's long-term technical uptrend.

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