Copper 6980 (-50)

Lead 1915 (-15)

Zinc 1920 (-25)

Nickel 20100 (0)

Aluminum 2057(0)

“Everywhere we look in this region, we see growth,” Martin Abbott, chief executive officer of the LME, said in an interview on Bloomberg Television in Singapore today. “All of the numbers are so impressive,” Abbott said.

Asian nations including China are leading the global economy out of recession, boosting demand for metals such as copper, nickel and tin. The LME has announced talks with Singapore Exchange Ltd. on cooperation, and plans more metal warehouses in the world’s fastest growing region.

“We are recognizing that the growth in Asia is not cyclical, it is structural, and more and more of the business that we transact is going to be derived in this region,” Abbott said. “This is not simply a China story.”

Three-month copper futures have advanced for seven of the past eight years driven by rising Asian demand, and the contract has climbed 37 percent in the past 12 months to $6,664.75 a metric ton today. The LMEX Index of six industrial metals has gained 30 percent over the past year.

‘We See Growth’

“When you look at what’s happening throughout Asia, I think we’re looking at a long-term story of infrastructure build, industrial build and GDP growth,” Abbott said, citing expansions in Indonesia, Vietnam and Malaysia.

Abbott’s view echoes that of commodity bulls such as Singapore-based investor Jim Rogers, who has said that economic growth in Asia is powering demand. Rogers said earlier this week that “you should own commodities because that’s your only refuge,” backing silver and farm goods such as rice.

The International Monetary Fund yesterday raised its forecast for global growth to 4.6 percent this year, reflecting a stronger-than-expected first half. The lender increased the 2010 growth forecasts for China to 10.5 percent and for India to 9.4 percent for the year to March.

China’s economy expanded 9.1 percent last year, boosted by an unprecedented 9.59 trillion yuan ($1.4 trillion) of credit extended by banks in 2009 and a 4 trillion yuan, two-year fiscal stimulus plan. The nation is the world’s largest metals user.

Indonesia, Southeast Asia’s largest economy, may accelerate to 5.9 percent growth this year, Finance Minister Agus Martowardojo said yesterday.

Singapore Talks

The London-based metal exchange, founded in 1877, has begun talks with Singapore Exchange Ltd., operator of the local derivatives and securities exchange, on possible cooperation, according to a statement yesterday. The LME opened its first overseas office in the Southeast Asian city-state this year.

“The crisis has been a huge opportunity for the LME,” Abbott said yesterday to mark the exchange’s new Singapore office, referring to the global credit crisis. “We have actually seen more business coming onto the exchange because of the crisis, because companies are even more aware of the need for counterparty risk management.”

Abbott, who became chief executive of the LME in 2006, has overseen the introduction of cobalt and molybdenum futures. Trading volumes last year were the second highest on record after 2008, with a notional value of $7.4 trillion.

“We are agnostic about price,” Abbott said today. “We are not agnostic to cyclical and structural trends,” such as the industrialization of Asia, he said.

While London Metal Exchange futures anticipate prices no higher than $6,519.50 a metric ton through the end of 2011, or 1.2 percent more than for delivery now, 13 of 14 analysts surveyed by Bloomberg expect a shortage next year. Traders are being too bearish because lower prices may curb spending on mines and exacerbate future shortages, said Goldman Sachs Group Inc., which forecasts a price of $8,050 in 12 months.

“In the short-term, we’re looking at slowing growth and oversupply, but longer-term, things look good,” said Michael Pento, the chief economist at Delta Global Advisors Inc. in Holmdel, New Jersey who correctly predicted January’s slump that began this year’s 12 percent decline. “The smart move is to buy copper for a few quarters down the road.”

Codelco Chief Executive Officer Diego Hernandez said last month that higher costs and lower ore grades mean new global supply “is coming very slowly.” Freeport-McMoRan Copper & Gold Inc. Chief Financial Officer Kathleen Quirk said new finds are “extremely rare” and “it is a very constrained market from a supply standpoint.”

Metal for delivery in three months, the benchmark contract, slumped 20 percent since April to $6,469 on concern the economic recovery would slow in the second half. Manufacturing growth weakened last month in China, Europe and the U.S., which account for as much as two-thirds of global demand.

Lower-Quality Ore

Copper for delivery in August is next year’s most expensive contract on the LME, trading at $6,519.50. Metal for immediate delivery costs $6,439.75. The first-half drop of 12 percent was the worst since 2001. The highest prediction for next year’s average in Bloomberg’s survey of analysts was $8,157 from Bart Melek, a commodity strategist at BMO Capital Markets in Toronto. That’s 26 percent more than now.

Mining companies are already missing analysts’ output forecasts because of lower-quality ore, providing “a bullish pricing signal,” Credit Suisse Group AG analysts led by Liam Fitzpatrick in London said in a report June 30.

For now, traders are focused on demand. China’s growth will slow to 9.25 percent next year, from 10.1 percent in 2010, according to as many as 27 economists surveyed by Bloomberg. The country’s refined-copper imports fell 8.1 percent in April and 9.7 percent in May.

U.S. President Barack Obama said June 29 that the world’s biggest economy is facing “headwinds” from the sovereign-debt crisis in Europe, where governments are cutting budgets. U.S. growth will slow to 2.9 percent in 2011 from 3.2 percent this year, while the euro zone will accelerate to 1.3 percent from 1.05 percent, according to surveys of as many as 66 economists.

Global Equities

More than $7.4 trillion was wiped off the value of global equities since mid-April because of concern slowing growth will sap demand. Energy and commodities companies led this year’s 12 percent decline in the MSCI World Index of developed markets. The S&P GSCI Total Return Index of 24 raw materials fell 14 percent.

Copper producers will have to develop new supplies even if demand stagnates, Quirk of Phoenix-based Freeport, the world’s second-biggest copper miner, said at a conference in New York on June 4. Average ore grades fell about 26 percent in the last two decades, according to Deutsche Bank AG. Next year’s shortage may be the biggest since 2004, Macquarie Bank estimates.

Deeper Discoveries

A greater proportion of discoveries in the last 10 years were more likely to need deeper mining methods than in the previous two decades, according to a presentation in May by London-based Rio Tinto Group. It cost about 95 cents to extract a pound of copper from an open pit mine in 2008, compared with $1.33 from an underground mine, according to data from Addlestone, England-based researcher Brook Hunt, a Wood Mackenzie company.

Prices may exceed the record $8,940 reached in July 2008 as early as the first quarter, according to Leon Westgate, an analyst at Standard Bank Plc in London who forecast this year’s plunge. Copper will average $7,708 next year, the highest ever, according to the median in the Bloomberg survey of 14 analysts.

Demand will expand 6.4 percent to 19.98 million tons next year, the biggest gain since 2007, Morgan Stanley predicts. Refined copper from mines and scrap recycling will reach 19.95 million tons, the bank estimates. That production is worth about $143 billion at this year’s average price on the London Metal Exchange.

‘Declining Ore Grades’

The surplus will shrink next year because of “declining ore grades in mines, infrastructure problems and postponing planned mine projects due to problems with project financing,” Herbert Wirth, chief executive officer of Lubin, Poland-based copper miner KGHM Polska Miedz SA, said in an e-mail.

“The portfolio left to be developed has a lower quality than we have been used to for many years,” Hernandez of Santiago-based Codelco, the world’s biggest producer, said in an interview in New York last month. “For these new projects to be developed we need a higher copper price.”

Anglo American Plc, based in London, reported in April that first-quarter output dropped 14 percent from the previous three months because of lower ore grades. BHP Billiton Ltd. and Rio Tinto, the world’s biggest and third-largest mining companies, said the same month that year-on-year production in the period declined for the same reason.

Stockpiles monitored by the London Metal Exchange fell 20 percent to 444,500 tons since mid-February, equal to almost 9 days of global demand. Canceled warrants, or metal earmarked for delivery from warehouses, totaled 35,425 tons on July 1, the highest since March, data from the bourse show.

‘Decline Again’

“Copper supplies have started to decline again,” said Andrew Karsh, who helps manage $4.8 billion for the Credit Suisse Total Commodity Return Strategy team in New York. “What we see is a continual benefit in terms of the demand for copper.”

Stock analysts are already anticipating higher profit for mining companies. Freeport will report earnings per share of $8.17 this year and $9.14 next year, compared with $5.86 last year, according to the mean estimate of eight analyst estimates compiled by Bloomberg. Shares of the company fell 27 percent in New York trading this year.

Aurubis AG, the world’s largest copper smelter, gained 14 percent in Frankfurt trading. A shortage probably began in March and continued through the second quarter, CEO Bernd Drouven said in an e-mail. The company will report earnings per share of 3.59 euros ($4.50) this year, compared with a loss of 1.15 euros in 2009, according to the mean of eight analyst estimates.

BHP Billiton

BHP Billiton, based in Melbourne, fell 16 percent in London this year and Rio Tinto declined 15 percent. KGHM fell 14 percent in Warsaw. Codelco, the world’s largest copper producer, is not publicly traded.

“The industry as a whole is facing significant challenges,” said Greg Waller, vice president of investor relations at Vancouver-based Teck Resources Ltd., which mines copper in North and South America and expects to increase output by 40 percent in two years. “In 2011, we are expecting that growth will be back on track and consumption of copper will be strong while the supplies are tight.”

Copper 6495 (+20)

Lead 1770 (+10)

Zinc 1830 (+30)

Nickel 18745 (+45)

Aluminum 1935(+0)

Copper 6521(+41)

Lead 1729 (+19)

Zinc 1775 (+15)

Nickel 19255 (+95)

Aluminum 1943(-7)

Copper 6637(-33)

Lead 1786 (-14)

Zinc 1799 (-8)

Nickel 19920 (-5)

Aluminum 1981(-10)

Copper 6580 (-110)

Lead 1810 (+15)

Zinc  1790 (-15)

Nickel 19800 (-360)

Aluminum 1982 (-28)

Copper 6481 (-16)

Lead 1719 (+7)

Zinc 1755 (+1)

Nickel 19470 (+120)

Aluminum 1962 (0)

CMP Copper 6900 (+75)

Lead 1695 (+35)

Zinc 1730 (+8)

Nickel 18850 (-355)

Aluminum 1959 (+39)

Copper 6300 (+65)

Lead 1650 (+20)

Zinc 1730 (+2)

Nickel 19025 (+405)

Aluminum 1915 (-20)

Copper 6768 +0.37%

Lead 1771 +0.06%

Zinc 1880 -0.27%

Nickel 21375 -0.35%

Aluminum 2025 Direction for the Session Mixed.

Awaiting Key US Data S&P/CS Composite-20 HPI y/y & CB Consumer Confidence.

The 133-year-old exchange offered futures on the metals on its floor starting at 12:20 p.m. local time. Codelco, the world’s second-largest molybdenum producer, wants to support the molybdenum contract, according to Gonzalo Cuadra, a Codelco managing director.

The LME is expanding into so-called minor metals as it opens a first overseas office in Singapore and proposes a venture with the London-based Baltic Exchange to bring trading of freight derivatives onto a new exchange. The bourse handled $7.41 trillion of contracts last year, including 49.7 million in aluminum, 26.5 million in copper and about 30,000 in Mediterranean steel billet.

Trading in the new contracts may exceed steel “because moly and cobalt have a history of volatility and they have a wide range of industrial applications,” said Stephen English, marketing manager of SFP Metals (U.K.) Ltd. in London, who has traded cobalt for more than 30 years.

LN Metals International Ltd. traded the first two metric tons of cobalt at $43,650 a ton ($19.80 a pound), Nigel Dentoom, chairman of the company, said at the LME. He declined to say if LN Metals was the buyer or seller.

Molybdenum Traded

Molybdenum traded earlier today at $35,000 a ton ($15.88 a pound), exchange spokesman Stephen White said. Total trading volume won’t be available until tomorrow, he said. About five companies were involved in trading by midday today, said Chris Evans, head of business development at the LME.

Cobalt prices dropped 2.4 percent to $19.52 a pound this year, according to Metal Bulletin. The benchmark molybdenum oxide contract quoted by Metal Bulletin climbed 43 percent to $17.25 a pound. The LME estimates both markets combined at about $7 billion, compared with $5 billion for tin, which the bourse already trades.

“While we do not intend to utilize the molybdenum contract upon its launch, we will continue to monitor the activity on the exchange,” said Bill Collier, a spokesman for Phoenix-based Freeport-McMoRan Copper & Gold Inc., the world’s largest molybdenum producer.

Production of molybdenum last year was about 440 million pounds (199,581 tons), while cobalt output was 54,000 tons, according to Eric Taarland, a senior consultant at London research company CRU. Output of both metals exceeded demand, according to CRU estimates.

Molybdenum Demand

Molybdenum demand has gained because of growth in stainless steel output, while cobalt consumption was driven by sales of rechargeable batteries, according to Taarland.

There are 12 cobalt and molybdenum brands registered for delivery against the LME contracts, including Vale SA’s Vale Inco unit and Molibdenos y Metales SA.

The LME plans to combine its Mediterranean and Far East steel billet futures into a global contract. Volumes reached about 3.3 million metric tons of steel, worth $1.4 billion, since they were introduced in April 2008 to Feb. 12, according to the exchange.

Falling LME warehouse stocks might indicate that demand, at least in the form of restocking, is picking up. But it is more likely just stock reallocation into term financing deals, thanks to the steep contango structure in the nearby forward spread. It is certainly not a recovery in demand, which remains weak.

China’s annualized aluminium production hits 16 Mt/y. According to the International Aluminium Institute, China produced 1.331 Mt of primary aluminium in December, which when annualized suggests that China is on course to produce as much as 16 Mt in 2010.

Current capacity stands at about 17 Mt/y, with as much as 3 Mt/y more scheduled to come online should conditions be profitable. One obvious hurdle is costs. We estimate marginal costs of production in China stand at more than $2,100/t including VAT, from $2,000/t in November 2009 for grid-connected smelters, and against $1,550/t in Q1 2009. This is largely due to higher power tariffs and alumina prices.

SHFE spot aluminium was trading at $2,318/t (~$1,981/t excl VAT) on 8 February, down 10% from mid- January, meaning marginal grid-connected producer costs are not being met. For smelters with integrated power, representing more than half of total Chinese smelters, marginal costs are currently $1,900/t-$1,950/t. Chinese aluminium consumption will however remain strong and we do not expect SHFE prices to languish at current levels long after the Chinese New Year holiday period ends.

Alcoa’s Italian job. Alcoa’s attempts to force the Italian authorities to offer cheaper power tariff rates could pay off, as the government attempts to avert job losses before regional elections in March. If Alcoa succeeds it will be a coup for the company, but in the longer term the shift of aluminium production centers to regions offering cheaper electricity costs will continue to expand at the expense of US and EU operators.

Short-term outlook on aluminium

The market was surprised at the severity and rapidity of the correction, but sentiment is a fragile thing and there appears little in the immediate term that will see aluminium prices do more than consolidate at their current levels. Short-term price: $1,900/t-$2,150/t.

Spot gold was at $1,072.40 an ounce at 1608 GMT versus $1,065.55 late in New York on Friday, having earlier touched a high of $1,073.50. In the last session it slid to $1,043.75, its lowest since Nov 2, as the euro fell on fears over the outlook for some euro zone economies.

US gold futures for April delivery on the COMEX division of the New York Mercantile Exchange rose $18.50 to $1,070.70 an ounce. From a technical perspective, resistance near the $1,050 level held on Friday, preventing a move down towards the 200-day moving average near $1,020 an ounce. A breach of this area would lead to a sharper sell-off, analysts said. Among other precious metals, silver was at $15.16 an ounce from $15.11 an ounce, platinum at $1,477.50 from $1,479.50 and palladium at $401.50 from $402.50.

Copper bounces: Copper rallied on Monday as investors and consumers, seeing bargain prices and believing in the stronger China demand story, piled in.

Benchmark copper on the London Metal Exchange traded at $6,386 a tonne at 1515 GMT from $6,265 at the close on Friday. Earlier on Monday the metal, used in power and construction, touched $6,475 a tonne. Aluminium traded at $2,000 from versus $1,980 on Friday. LME stocks of the metal, used in transport and packaging, fell 7,450 tonnes to 4.58 million tonnes.

Zinc touched a high of $2,053 a tonne and traded at $2,005 from $1,940 on Friday, while battery material lead was at $1,949 compared with $1,940. Steel-making ingredient nickel traded at $17,031 from $17,005, and tin at $15,250 from $15,350.

* Eyes on Greece, sovereign debt markets.

(Adds closing prices)

By Michael Taylor and Pratima Desai

LONDON, Feb 8  - Copper rallied on Monday as investors and consumers, seeing bargain prices and believing in the stronger China demand story, piled in.

Benchmark copper MCU3 on the London Metal Exchange ended at $6,450 a tonne from $6,265 at the close on Friday. Earlier on Monday the metal used in power and construction touched $6,475.

A frenzied sell-off across equities and commodities because of sovereign default fears and a stronger dollar last week pushed copper to $6,225, the lowest since Oct. 19, and 20 percent below this year’s high of $7,796 on Jan. 7.

“The correction was a buying opportunity, the impact of tightening in China is completely irrelevant … Bank lending in China has actually been going into deposits, not into spending,” said David Wilson, analyst at Societe Generale.

China is the world’s largest consumer of base metals.

“Wider concerns — the situation in some European countries and their sovereign risk had some kind of impact in terms of driving investors away from riskier assets,” Wilson said.

Worries about Greece’s sovereign debt and a potential spillover have rattled markets and boosted the dollar, which is near 8-1/2 month highs against the euro. [MKTS/GLOB]

A stronger U.S. currency makes dollar-denominated metals cheaper for holders of other currencies.

However, Germany’s Finance Minister Wolfgang Schaeuble said on Monday that the Group of Seven industrialised nations is confident the European Union will sort out Greece’s debt problems. [ID:nLDE6170PC]

“There was a big sell-off on everything last week and it was probably overdone,” said Herwig Schmidt, head of sales at Triland Metals. “Maybe this is a good buying opportunity.”

STOCKS EASE

Aluminium MAL3 closed at $2,012 from versus $1,980 on Friday. LME stocks of the metal, used in transport and packaging, fell 7,450 tonnes to 4.58 million tonnes.

A large portion of those stocks are tied up in finance deals, to release cash for producers and to earn banks higher returns than they would get in money markets.
But while stocks have fallen, investors remain concerned about the pace of the global economic recovery, and further tightening in China.

“Mixed economic data has cast doubt on the speed of the economic recovery,” Standard Bank said in a note.

“The past couple of weeks have seen commodities come under pressure as concerns over Greece and the other Southern European nations have seen the dollar strengthen.”

Traders expect trading to remain subdued until Feb. 22, after the Chinese New Year holiday.

Zinc MZN3 touched a high of $2,053 a tonne and ended at $2,022.5 from $1,940 on Friday and battery material lead MPB3 at $1,965 a tonne compared with $1,940.

Steel-making ingredient nickel MNI3 closed at $17,200 from $17,005, and tin MSN3 at $15,200 from $15,350.

Analysts say nickel may come under pressure after Brazil’s Vale (VALE5.SA: Quote) said it will push its Sudbury, Ontario operations towards full production, regardless of whether it is able to settle a strike at the complex.

“These factors are expected to start a reversal of the upward trend in inventories over the coming months,” the company said in its financial results.

Grupo forecast that its Mining Division (which now includes U.S. copper miner Asarco) is expected to produce 720,000 tons of copper this year without including any production from Mexico’s Cananea copper mine, which remains closed because of a lengthy labor dispute.

Copper production for 2008 was 496,022 metric tons, a 1.5% increase over 2008 production. “This increase is the result of our strict operating focus and improved ore grades at La Caridad [in Mexico] and [Peru's] Toquepala mines,” the company said in its financial results release.

GMexico said, “The outlook for molybdenum is equally positive, and this metal will start trading on the London Metals Exchange in (LME) in February.”

The company reported a 14% increase in moly production last year for a total of 18,687 metric tons. Zinc production increased 3.3% in 2009 to 110,430 tons. The increase was due principally to improved ore grades at La Caridad and improved grade and recovery at Cuajone in Peru, according to Grupo.

Last year’s silver production increased 8.2% to 13.3 million ounces of silver while gold production was reported at 15,088 ounces, a slight increase over 2008.

ASARCO

Meanwhile, Grupo Mexico’s hard-fought reacquisition of U.S. copper miner Asarco will generate tax benefits of US$1.024 billion for Grupo, which will be realized beginning the second quarter of this year.

Asarco is the third largest copper producer in the U.S. and has reserves of 5 million tons of copper concentrate, representing 30 years of mine life, according to its parent.

“With the integration of Asarco, GMexico positions itself as the number one company in copper reserves worldwide,” the company claimed, “ahead of Codelco and Freeport, and reaffirms its position as one of the main producers of mined and refined copper.”

Asarco contributed 10,646 tons of copper, 122,068 ounces of silver and 24,405 tons of sulfuric acid as GMexico had only consolidated the Asarco operation for 22 days beginning December 10, 2009.

Grupo said it contributed $705 million in cash and secured financing of $1.5 billion to capitalize Asarco in the amount of $2.2 billion. Asarco contributed $1.357 billion from its own cash and made payment to its credits for an aggregate cash consideration of $3.562 billion.

In addition a one-year promissory note of $280 million was delivered to Asarco’s asbestos creditors.

CAPEX PROGRAM

On January 29th, Grupo’s board of directors also approved a $3.9 billion capex program for the next three years. Of that, $2.95 billion will be invested in the Mining Division, $576 million in the Transportation Division, and $384 million in the Infrastructure Division.

The board approved a $2.8 billion capex program for Southern Copper Corporation (SCC) including $1.8 billion to increase SCC’s annual copper production by 120,000 metric tons by the end of 2011 with the completion of the Peruvian Tia Maria project. The capex program will also expand the Toquepala mine in Peru, which will increase annual production by 100,000 metric tons of copper and 3,100 metric tons of moly by 2012. The Cuajone mine will be modernized and expanded to increase annual copper production by 72,000 metric tons of copper.

The board also voted to invest $1 billion in Mexico “if and when the company has been provided with the necessary labor and judicial conditions required for such an investment.”

The budget includes the expansion of production at the La Caridad mine by 50,000 metric tons of copper and 3,000 tons of moly annually. The program also includes the construction of a power plant “resulting in significant savings of approximately 50% of our current costs.”

The three-year investment program could include an additional $3.85 billion of investment in Mexico, which would be directed towards projects at the Cananea mine and the development of the Greenfield copper and gold deposit of El Arco in Baja California.

“These incremental investments would result in an additional 490,000 tons of copper production per year to the previously mentioned 342,000 tons,” the company said. “This investment is suspended until the company is provided with the labor conditions and the availability of competitive energy rates that are required to undertake these projects.”

The capex investments programmed for Asarco over the next three years are $150 million.

FINANCIALS

GMexico reported net consolidated earnings of $887 million or 11-cents per share for 2009, down $189 million or 17.6% from 2008 which reported net earnings of $1.076 billion or 14-cents/sh.

For the fourth-quarter 2009, Grupo reported net income of $342.05 million or 4-cents/sh, up 297.5% from a loss of $173.2 million or negative 2-cents/sh reported during the fourth quarter of 2008.

But investors were cautious ahead the Lunar New Year holiday, which starts on Feb. 14, and will keep Chinese markets shut for a week. Many of China’s factories also close and demand for the metal used in construction and power drops.

By 1026 GMT, copper for three-month delivery MCU3 on the London Metal Exchange traded at $6,845 a tonne from $6,791 at the close on Monday and compared with a session low at $6,727.

London copper hit a two-and-a-half month low at $6,600 on Monday, before turning around later in the session, after data showed U.S. manufacturing grew in January. [ID:nN01363414]

“Funds have been strong buyers this morning,” said David Thurtell, an analyst at Citigroup. “The ISM data appears to have restored some calm to the bulls who were unsettled by the sell-off of the past few weeks.”

Concerns about China tightening monetary policy remain after strong purchasing managers data on Monday, and as Australia surprised many by holding interest rates steady on Tuesday. [ID:nTOE61003S] [ID:nSGE61003K]

Copper fell 8.5 percent last month, in part due to increasing worries about rising LME inventories, which indicate that demand outside China, the world’s largest metals consumer, remains weak.

The latest data showed copper stocks fell 2,375 tonnes to 541,150 tonnes but remain close to a more than six-year high.

“Inventories are still very high — copper close to six-year highs — and this is dragging on sentiment,” said Eugen Weinberg, an analyst at Commerzbank.

“Going forward in two weeks, the Chinese go into the New Year and they will close all factories, so manufacturing will drop strongly,” he added. “People are afraid of this, so are not taking positions or buying stocks before the New Year.”

INVENTORIES

Aluminium MAL3 traded at $2,105 from $2,085. Inventories in the metal, used in transport and packaging, slipped 3,125 tonnes but are still at near record levels above 4.6 million tonnes.

A large portion of those stocks are tied up in finance deals, to release cash for producers and to earn banks higher returns than they would get in money markets. [ID:nGEE5BA277]

Steel making ingredient nickel MNI3 traded at $18,250 from $18,000, while zinc MZN3 traded at $2,162 a tonne from $2,145.

Anglo-Swiss miner Xstrata Plc (XTA.L) reached a tentative deal with unionised workers at its Canadian nickel mining operations in Sudbury, Ontario, on Monday, averting a strike that would have all but shut down base metals production in the Sudbury region. [ID:nN01179992]

The agreement was reached in the shadow of a strike by more than 3,000 workers at Brazilian miner Vale’s (VALE5.SA) Sudbury nickel and copper operations, and smaller strikes at Vale’s Voisey’s Bay mine in Eastern Canada and at its Port Colborne, Ontario, processing operations.

The Vale Sudbury strike is now in its seventh month, with no signs that bargaining will restart any time soon. Some analysts have speculated a deal at Xstrata could spur Vale and the United Steelworkers union to restart talks. [ID:nN01179992]

Battery material lead MPB3 was at $2,088 from $2,045, while tin MSN3 was at $16,400 from $16,150.

Investors are keeping a close eye on movements in cancelled warrants — material already earmarked for delivery from LME warehouses.

On Monday, lead cancelled warrants were at 15,650 tonnes compared with 75 tonnes on Dec. 17.

“The auto sector should be very positive for lead, plus the issue of constrained mine supply,” said David Wilson, an analyst at Societe Generale. “We do expect consumption to be very positive this year — particularly driven by the Chinese auto sector, and a rebound in U.S. auto production.”

For graphics on LME metal inventories, click on:

here

here

here

here

here

Metal Prices at 1031 GMT Metal Last Change Pct Move End 2009 Ytd Pct

move COMEX Cu 308.75 0.90 +0.29 332.75 -7.21 LME Alum 2105.00 20.00 +0.96 2230.00 -5.61 LME Cu 6857.00 66.00 +0.97 7375.00 -7.02 LME Lead 2086.00 66.00 +3.27 2432.00 -14.23 LME Nickel 18175.00 175.00 +0.97 18525.00 -1.89 LME Tin 16350.00 200.00 +1.24 16950.00 -3.54 LME Zinc 2161.00 16.00 +0.75 2560.00 -15.59 SHFE Alu 16215.00 25.00 +0.15 17160.00 -5.51 SHFE Cu* 54280.00 -100.00 -0.18 59900.00 -9.38 SHFE Zin 17155.00 -85.00 -0.49 21195.00 -19.06 ** 1st contract month for COMEX copper * 3rd contract month for SHFE AL, CU and ZN SHFE ZN began trading on 26/3/07

* Many metal stocks rising, locked into finance deals * Sudbury nickel mine talks watched

(Recasts, adds comments/details, changes dateline pvs SINGAPORE) By Michael Taylor

LONDON, Feb 1 (Reuters) – Copper fell to a two-and-a-half month low on Monday, as strong economic data heightened investor concerns that China, the world’s top metals consumer, may further tighten monetary policy. By 1051 GMT, copper for three month delivery on the London Metal Exchange fell to $6,680 a tonne from $6,745 at the curb on Friday, according to the LME. It earlier touched a session low at $6,600, a level not seen since Nov. 16 and was on track for a fifth day of declines, its longest losing streak since August 2009.

Tin prices fell more than 6 percent to its lowest since Dec 24 2009, chasing a broad sell-off in metals last week, and was set for its biggest one-day fall since early July 2009. “It’s just a change in sentiment really,” said Alex Heath, head of base metals and RBC Capital Markets. “I don’t think anybody was under any misapprehension that metals had got ahead of themselves in terms of actual demand and growth … Trees do not grow to heaven.

“You can’t have this amount of money flooding around the system without (China) having some kind of tweaking processes going on,” he added. “You are still going to have huge growth this year … it’s healthy.” China’s economy made a strong start to the year, according to a pair of business surveys released on Monday that also underlined the mounting challenge policymakers face to curb inflation.

An index based on an official survey of purchasing managers last month eased from a 20-month high in December but remained firmly in expansionary territory, while an index derived from a companion poll by HSBC scaled an all-time high. That comes on the heels of 5.7 percent expansion in the U.S. economy in the fourth quarter, the quickest pace in more than six years, the Commerce Department said.

But some analysts say Chinese concerns are overblown. “With the risks in China still tilted towards inflation and stronger-than-expected growth, despite the shift towards less accommodative policy, the problem in China remains too much demand not too little,” Goldman Sachs said in a note.

“Given that we have already assumed slowing metals demand growth for China in 2010, this suggests that the risks to Chinese metals demand and our forecasts are likely skewed to the upside rather than to the downside in coming months.” Copper fell 8.5 percent last month, in part due to rises in LME inventories, which indicate that demand outside China remains weak. Copper prices rose 140 percent last year.

The latest data showed stocks rose 2,475 tonnes to total 543,525 — their highest since late February 2009. Among other base metals, aluminium traded at two-month lows at $2,068 versus $2,080 at the curb on Friday. LME stocks in the metal, used in transport and packaging, fell 625 tonnes but remained near record levels above 4.6 million tonnes.

Steel making ingredient nickel traded at $18,375 from $18,500 at the curb on Friday, while battery material lead was at $2,004.50 from $2,020. Lead earlier touched a low of $1,960, a level not seen since August. Recent rises in cancelled warrants — material earmarked for delivery — are under close scrutiny from metals investors for signs of improving demand.

On Friday, cancelled warrants for lead were 15,850 tonnes, compared with 11,700 on Jan. 28 and 75 tonnes on Dec 17. LME lead stocks rose 200 tonnes to hit 157,500 tonnes, a level not seen since September 2003. Contract talks between Xstrata and workers at its main nickel operations in Sudbury, Ontario were also being watched by many traders.

Zinc traded at $2,090.25 a tonne from $2,110 at the curb on Friday, and tin was at $16,300 from $17,200. Zinc earlier hit a three and a half month low at $2,074. RBC’s Heath said because tin is not traded as much by funds compared to other LME metals, it tends to be more volatile.

“It doesn’t take too much to do that in tin,” he added.

Metal Prices at 1059 GMT Metal Last Change Percent Move End 2009 Ytd Percent move COMEX Cu 303.05 -1.55 -0.51 332.75 -8.93 LME Alum 2062.00 -18.00 -0.87 2230.00 -7.53 LME Cu 6668.00 -77.50 -1.15 7375.00 -9.59 LME Lead 1995.00 -25.00 -1.24 2432.00 -17.97 LME Nickel 18200.00 -300.00 -1.62 18525.00 -1.75 LME Tin 16250.00 -950.00 -5.52 16950.00 -4.13 LME Zinc 2083.00 -27.00 -1.28 2560.00 -18.63 SHFE Alu 16190.00 150.00 +0.94 17160.00 -5.65 SHFE Cu* 54380.00 -1050.00 -1.89 59900.00 -9.22 SHFE Zin 17240.00 -155.00 -0.89 21195.00 -18.66 ** 1st contract month for COMEX copper * 3rd contract month for SHFE AL, CU and ZN SHFE ZN began trading on 26/3/07.

Outlook

Copper prices could trade higher on expectations of higher imports in China. A weaker dollar could additionally add to the upside. Crude oil prices are expected to rise as OPEC is not expected to raise production this year and Chinese imports could rise further. Gold prices could rise, taking cues from the weakness in the dollar. The US markets remain closed on account of Martin Luther King Day today

The Federal Reserve has kept its target rate at zero percent to 0.25% since December 2008 to revive the economy. On the back of expectations of a lower interest rate in the US, the dollar is expected to weaken further. Weakness in the dollar will help gold prices as a weaker dollar will make the yellow metal look attractive for holders of other currencies.

Copper prices gained almost 2% till 5.00 pm IST as continued Chinese buying coupled with the first inventory decline in 52 days supported an upside in prices. Copper prices traded above $7500 on the LME today on expectations of higher imports by China in the coming months. Prices could continue to trade higher as upcoming data releases by China on Thursday include – GDP, industrial output and detailed trade data. Chinese economic data is expected to come on the positive side and may boost prices further.

 But aluminium may see some upside as worries about energy
supplies in Henan province and upbeat assessments on demand
from UC Rusal counter disappointing fourth quarter results from
Alcoa Inc (AA.N: Quote).

 FUNDAMENTALS

 * Three-month copper on the London Metal Exchange MCU3
rose $102.50 to close Monday at $7,567.50 a tonne, and extended
gains in late trade to $7,587.50 in after-hours trading.

 * But when Shanghai closed on Monday copper stood around
$100 higher at $7,670 a tonne.

 * Chile's Mining Minister Santiago Gonzalez warned that
high stock levels for copper could result in a significant
correction in metals prices.

 * "We are worried that stock levels are climbing higher. We
are at 700,000 tonnes at the moment, while prices remain
(high). This means that at any minute we could see a violent
change and prices could fall," Gonzalez said.

 * LME inventories rose 4,575 tonnes on Monday to 515,200
tonnes, their highest since March 2009.

 * Aluminium may see support after news smelters in China's
Henan province, which account for a fifth of capacity in the
world's top producer of the metal, face power cuts as a coal
shortage threatens electricity generation.

 * Shanghai aluminium prices jumped 4.1 percent on Monday
boosted by the power supply problems and rising alumina costs.

 * China's power shortages so far have affected aluminium
smelters only in Henan and could improve from mid-February as
the winter wanes, said Wen Xianjun, vice chairman of the China
Nonferrous Metals Industry Association. [ID:nTOE60A05Q]

 * Also bullish United Company RUSAL, the world's largest
aluminium and alumina producer, expects global aluminium
consumption to rise in 2010 on demand from China.
[ID:nTOE60A04B]

 * However, Alcoa Inc (AA.N: Quote) posted a narrower
fourth-quarter loss on Monday as aluminium prices inched up,
but the result fell short of expectations and its shares
dropped more than 6 percent in after-hours trade.

 * Excluding charges of 28 cents a share for restructuring,
special items and discrete tax items, Alcoa earned 1 cent a
share on an operating basis, short of the 6 cents a share
expected, on average, by analysts. according to Thomson Reuters
I/B/E/S.

 MARKET NEWS

 * The U.S. dollar slipped for the second straight trading
day on Monday as last week's disappointing U.S. jobs data again
pushed investors to sell and comments from a Federal Reserve
official that U.S. interest rates should stay low for some time
further eroded support.

 * The dollar index .DXY, a gauge of its value against a
basket of currencies, was up 0.15 percent by 0019 GMT. [USD/]

 * Oil prices closed marginally lower on Monday, after
earlier rising to a fresh 15-month high, as the promise of
milder weather in the United States took some steam out of the
market. [O/R]

 * U.S. industrial shares lifted the Dow and the S&P 500 on
Monday to new 15-month highs after China bolstered expectations
the world economy would strengthen, but Nasdaq fell on
profit-taking in tech stocks. [.N]

 DATA/EVENTS

 * The following data is expected on Tuesday ECON:

 - Japan economy watchers poll (0500 GMT)

 - U.K. trade balance          (0930 GMT)

 - U.S. ICSC chain stores      (1245 GMT)

 - U.S. international trade    (1330 GMT)

 - U.S. Redbook                (1355 GMT)

 - U.S. IBD economic optimism  (1500 GMT)

Copper +3150MT

Lead +225MT

Zinc +650MT

Nickel +168MT

Aluminium -2000MT

Tin +50MT.

* Copper inventories rise to highest since April

(Recasts, adds comments/details, changes dateline from SHANGHAI)

By Michael Taylor

LONDON, Jan 4  – Copper rose almost 2 percent to a 16-month high on Monday, building on gains of about 140 percent last year, on strikes in top producer Chile and as more investors piled into the metal.

But analysts warned of volatile trading and price corrections in the coming weeks, as rising inventories prove that outside of China, fundamentals remain weak. By 1102 GMT, copper for three-month delivery on the London Metal Exchange traded at $7,504 a tonne from $7,375 at the close on Thursday. The metal, used in power and construction, earlier touched $7,509.75, its highest since Sept. 1, 2008.

“If you are trying to justify the moves over the last month, you will fail to find any real driver except exceptional demand in China,” said Commerzbank analyst Eugen Weinberg. “Everywhere else we are seeing increased in inventories.

“It is due to only one reason — demand from investors.” The latest LME data showed copper stocks rose 75 tonnes to total 502,400 — their highest level since April.

Aluminium inventories fell 4,475 tonnes but remain near record peaks above 4.6 million tonnes, while nickel stocks rose 414 tonnes to a new all-time high at 158,424 tonnes.

Commerzbank’s Weinberg added that the recent rise in the copper price due to supply concerns in Chile was overdone.

Union workers at Chile’s giant Chuquicamata copper complex, the world’s second biggest, began a strike over pay early on Monday, a union leader said.

Unprecedented Chinese buying, investor cash, a weaker dollar and improving economic data, helped the red metal to rally in every quarter last year.

The outlook for China’s economy, and thus for metals demand, remains robust after the manufacturing sector steamed ahead in December, with strong rises in new orders and output driving the official purchasing managers’ index (PMI) to a 20-month high.

The dollar dipped, coming off an earlier four-month high against the yen on Monday but remained broadly supported on growing optimism about the prospects for a U.S. recovery.

A weak U.S. currency makes metals priced in dollars less expensive for holders of other currencies.

“It’s more that people are selling the dollar to move into riskier assets, including metals,” said David Wilson, director of metals research at Societe Generale. “Index re-weightings are also happening over the next week or so.”

“Every indication is that indices will reduce percentage exposures to metals because they out-performed so dramatically last year,” he added. “But we’re still expecting indexes to take up more metal because of bigger flows of money coming in.”

On the macro calendar, U.S. December employment data due later this week will be watched for evidence of economic recovery and renewed demand.

Other metals tracked copper, with aluminium at $2,273.75 versus $2,230. The metal, used in transport and packaging, earlier touched a near-three week high at $2,278.

Steel-making ingredient nickel traded at $19,060 from $18,525, while battery material lead was at $2,494 from $2,432.

Zinc traded at $2,622.50 a tonne from $2,560, down from a high at $2,632.75, it’s highest level since March 2008.

Tin edged up to $17,355 from $16,950. Used in electrical solder, tin hit a 15-month high at $17,500.

Defying the Dollar

The dollar remained strong against the yen and other key rivals, but copper took its cue more from the looming strike as well as the better than expected Chicago PMI. As such, the rebound in dollar had little impact on copper (as well as other industrial metals) on confidence about the bull-run into 2010, thanks mostly to speculative buying.

So far, the red metal has more than doubled this year, leading gains in the CRB Index of 19 raw materials, and climbed almost fourfold in the decade as consumption rose in emerging economies including Chindia.

However, despite the improving global economic backdrop, there is far from a consensus on how copper will fare throughout the next 12 months.

2009 – Beyond Reality

Despite its red hot streak in 2009, copper’s continuous rally in the face of swelling inventories, a sign of weak consumption, has perplexed many in the market. Stockpiles and production worldwide have steadily increased this year alongside with copper prices. (Fig. 2)

The latest data showed London Metals Exchange (LME) stocks rose 6,375 tons to above 500,000 tons, their highest level since April. Furthermore, the almost 600,000 tonnes in LME and Shanghai exchange warehouses are enough to cover the lost output from strike at Chuquicamata for more than a year.

Copper A LA Gold

China’s unprecedented $585 billion infrastructure-focused stimulus package and strategic stockpiling efforts have had a major impact on copper prices this year. This is evidenced by the 165% year-over-year surge of China’s imports of refined copper to 2.58 million tonnes in the first nine months of 2009.

On that note, the market has looked beyond warehouses. Some even say copper is behaving more like gold rather than strictly a base metal. (Fig. 3)

Of course, a number of other factors such as an anticipated global economic revival, new investment cash, index/fund buying, a weaker U.S. dollar, concern over labor disruptions, have also contributed to overshadow bearish indications of the copper inventory build-up.

Copper Currency Standard?

While India is trying to accumulate gold reserves, China is going one step forward by buying up industrial metals on a scale that appears beyond the usual commercial reasons. Some believe Beijing may have made a strategic decision to stockpile metal as an alternative to US Treasuries and dollar holdings as it safeguards China’s industrial revolution, while the West may one day face a supply crisis.

Speculation of an ultimate “Copper Standard” also swirled when in March, 2009, Zhou Xiaochuan, the governor of People’s Bank of China, reportedly called for a world currency modelled on the “Bancor”. The Bancor was to be anchored on 30 commodities – a broader base than the Gold Standard.

Copper “The Red Gold”?

Meanwhile, India’s $1.2 trillion economy expanded 7.9% in the 3rd quarter of 2009, the quickest pace in six quarters. The growth lagged behind only China among the world’s major economies with equally strong demand from auto and power sectors. Copper demand in India is expected to soar by 6% next year, in line with the GDP growth forecast of 7%. .

As China and India each is looking to compete and develop their economies together, India could step up their copper buying efforts as well. Then, currency standard or not, copper could become the ultimate red gold as a strategic asset as well as an inflation hedge.

Electric Avenue Will Take It Higher

China is expected to expand 8.5% this year, according to the median estimate of economists surveyed by Bloomberg. Urbanization plus the next industrial revolution led by hybrid cars need plenty of copper. China plans to boost its annual production of electric or hybrid cars to 500,000 in the next two years, up from 2,100 last year. Such a shift would require huge amounts of electrically conductive copper.

Technically Bullish

Copper prices are still off their all-time high of $8,940 on LME notched in July 2008, before the global economic downturn caused markets to tumble.

Most of the technical signals for copper (Fig. 1) are very bullish, albeit a bit over-bought on some indicators like RSI & Bollinger Bands. But since the market just put in a new high, it may continue to become more overbought before corrections may occur.

Right now, it looks like the $7,500 to $7,600 levels should be the next resistance with potential retracement towards $6,500 and $5,800 levels. But if Western recovery continues to disappoint, or remain mixed, as they currently are, then we could see prices revert back to between $5,000/t to $6,000/t in 2010.

Chinese Copper Control

China is the world’s largest copper consumer with about 38% market share, and its record levels of copper imports this year has made up for some of the slack demand in the U.S. and Europe. Copper, the hottest among the base metals, is controlled mostly by China as the single largest buyer in the world.

Now, some market participants say imports of refined copper into China may not reflect demand for at least the next six months, or longer, as China digests stocks built this year as a result of record imports.

In addition, China Daily reported on Nov. 12, 2009 that copper stockpiles held in duty-free warehouses in China may be re-exported after surging to as much as 350,000 tons from almost none at the start of the year. The country’s imports of refined copper may lower to 1.6 million tons in 2010. However, the 350,000 tons reportedly belong to mostly private speculators and account for a fraction of the total imports.

Clearly, there is some copper supply/demand imbalance in China as the country is not entirely immune to this synchronized global recession. However, with copper price doubling up in 2009 and as China generally prefers buying on the dip, this re-export could also be a strategic tactic of Beijing in an attempt to push down the prices of copper.

2010 – Reality Bites

The general “recovery trade”, predicated primarily on China and other emerging economies infrastructure and industrial growth, lifted copper to overshoot the underlying fundamentals and somewhat disconnected from reality in 2009.

The continued rising copper stocks suggest demand has yet to recover outside China. As we enter 2010 with China taking an expected copper break, the trend for copper prices will increasingly be determined by the shape of economic recovery in the OECD.

The U.S. is the dominant focus for signs of recovery. The EU 15, which accounts for about 20% of global copper consumption, is also important, but the lead will come from the US.

The past 12 month it’s been a variety of reasons that lifted all commodities higher. Copper will unlikely have a repeat performance of 2009. The strength in copper may remain at least in the first quarter of 2010, but after that the market will face a lot of uncertainties regarding the Dollar, interest rate, monetary policy, China’s copper imports/exports change, and the high inventories as well.

An Economic Precursor

Either as a currency or as a new precious metal, one thing for sure is that copper is a bellwether for the economy because it is mainly used in housing, power generation and other cyclical sectors; therefore, it tends to lead other commodities.

Copper price dynamics over the next year or two could serve as a precursor to see if Asia can shift its focus from an export-oriented model to one that’s more internal consumer-based, as well as a realistic gauge of the global economy.

Strike votes at two large Chilean copper operations, Codelco’s Chuquicamata mine and Xstrata PLC’s Altonorte smelter, are seen lifting sentiment as the year grinds to a close and investors assess what next from markets that have rallied around 140 percent this year,

“The strength in copper is likely to continue at least through January, as sentiment is very optimistic and so far there doesn’t seem to be any major news that would alter the trend,” Guo Yong, an analyst at Jinrui Futures, said.

“Investors are paying very little attention to fundamentals these days — it’s mainly the investment demand that’s pushing copper prices up. Spot copper isn’t selling well, consumers still think the current prices are too high.”

London Metal Exchange copper jumped 2.8 percent to $7,265 by 0707 GMT from Thursday’s evening evaluation of $7,070, after a four-day hiatus. Copper earlier touched $7,273, its highest since early September 2008.

Benchmark third-month Shanghai copper rose 100 yuan to 58,360 yuan a tonne at the close, having scored a 16-month peak in the previous session. The more-active fourth month, April, rose 60 yuan to 58,590 yuan.

Worries about the 42 percent rise in LME stocks and the 485 percent surge in inventories in Shanghai this year could be soothed a little after workers at the two large Chilean operations voted to strike.

The vote at Chuquicamata threatens output of around 4 percent of the world’s copper concentrate, while the vote at Xstrata PLC’s Altonorte smelter could cut 1.5 percent of global output of copper anode.

“Those Chileans have dealt a double blow to copper bears. These strikes will lift copper sentiment, but industrial action in Chile rarely lasts, so unless they are really dug in it won’t change the fundamentals much,” a dealer in Singapore said,

Shanghai zinc dipped 30 yuan to 20,340, having scored a 20-month high in the previous session, while aluminium rose 1.1 percent to 16,980 yuan, and earlier hit a new 15-½ month peak of 17,030 yuan.

LME aluminium rose 1.1 percent to $2,280 from an evening evaluation of $2,255 on Christmas Eve, while zinc jumped 3.3 percent from Thursday’s assessed value, to $2,578, retreating $10 from an earlier peak when prices hit their highest since mid-March 2008.

Aluminium may see support after news that output from the world’s biggest bauxite miner, Guinea, fell by more than a fifth in the first nine months of 2009 due to “institutional instability”.

 FUNDAMENTALS

 * Benchmark third-month Shanghai copper SCFc3 rose 950
yuan or 1.7 percent to 58,580 yuan a tonne by 0238 GMT and
earlier hit 58,890 yuan, its highest since early September
2008. The more-active fourth month, April, hit 59,180 yuan, up
2.3 percent. The market is on course for a rise of almost 150
percent in 2009.

 * Deliverable copper inventories in warehouses monitored by
the Shanghai Futures Exchange fell to 96,362 tonnes from
104,377 tonnes a week ago, while stocks on warrant declined
11,892 tonnes to 30,609 tonnes.

 * Shanghai copper stocks have risen almost sixfold this
year, their first increase since 2005.

 * London Metal Exchange inventories, at 484,800 tonnes,
have risen 42 percent so far this year, their fifth consecutive
annual increase, and will see their highest year-end levels
since finishing 2002 at more than 850,000 tonnes.

 * For graphics showing global metals stocks, double-click:
 here
 here
 here

 * The LME remained shut on Monday for Christmas holidays,
but will reopen on Tuesday. Copper rallied to $7,167 on
Christmas Eve, $3 shy of a 16-month peak.

 * The latest boost to sentiment came from threats to supply
from South America, where 274 union workers plan to down tools
early on Monday at the 232,000 tonne-per-year Altonorte copper
smelter in Chile. [ID:nN27159011]

 * Elsewhere in the copper-rich nation, nearly 3,000 union
workers at the Chuquicamata mine complex, which produces around
4 percent of the world's copper, will vote on whether to accept
a final wage offer from state-owned Codelco [CODEL.UL].
[ID:nN27132980]

 * The same terms in a preliminary offer were voted down
last week, but union officials thought the offer would be
approved, despite some dissention amongst the rank and file.

 * Shanghai zinc SZNc3 jumped 3 percent to hit its highest
since March 2008 and aluminium SAFc3 rose 1.4 percent to a
15-½   month peak.
 PRICES
 Base metals prices at 0236 GMT
 Metal         Last       Change   Pct Move  End 2008  Pct chg
09
 SHFE Cu*     58580.00    950.00     +1.65   23840.00
145.72
 SHFE Alum*   16735.00    235.00     +1.42   11540.00
45.02
 COMEX Cu**     327.10      0.00     +0.00     139.50
134.48
 SHFE Zinc    20475.00    595.00     +2.99   10120.00
102.32
 Dollar/yuan          6.8268 \ 6.8286
  * 3rd contact month for SHFE aluminium, copper and zinc

Zinc has been selling at an average $1.05/lb this month on the London Metal Exchange (LME), the first time it has passed $1 since April 2008 despite continued lack of demand for the metal used to coat steel to make galvanized sheet. Analysts suggest the falling dollar has helped buoy prices for zinc and other nonferrous metals.

The consensus of analysts which sees the 2010 annual average up 21% from 75¢/lb this year to 87¢, because of expected speculative investment on commodity exchanges. Note that “investors waded back into most other commodities as the dollar weakened, making them less expensive for foreign buyers,” according to an Associated Press report. However, investors “now question how long the dollar will remain weak.”

The Federal Reserve has kept interest rates near zero this year, weakening the dollar and making assets like stocks and commodities more attractive to investors. When the U.S. economy begins to show signs of strength, investors are worried that the Federal Reserve might raise interest rates sooner than expected and potentially upend the rally in commodities.

The Federal Open Market Committee’s interest rate decision is due this afternoon. A report on TheStreet.com says “the central bank is widely expected to leave rates unchanged, but investors are anxious for any more insight on the timing of a future rate hike.” FOMC officers have been reiterating their intention to keep rates low for an extended period, as long as unemployment remains high and the inflation outlook is stable. However, The Street.com analysis says “signs are beginning to mount that those two factors are shifting.”

Here’s why: Wholesale prices, measured by the producer price index, jumped 1.8% in November, the Labor Department reported Tuesday. That easily outpaces expectations and poses a direct challenge to Fed Chairman Ben Bernanke’s recent comment that high unemployment would keep inflation concerns subdued. Meanwhile, the consumer price index for November, released by the Labor Department Wednesday, met expectations for a rise of 0.4%.

(Late-breaking update: The U.S. Federal Reserve said interest rates will remain near zero “for an extended period,” but acknowledged recent signs that the economy is gaining momentum after its worst slump in decades. The Fed left its target for the federal-funds rate unchanged at range of 0% to 0.25%. Its assessment of the economic landscape was more upbeat than a month ago, suggesting that central bankers are edging closer to withdrawing some of their support for the economy.)

Back to zinc, the global market was in surplus by 403,000 metric tons in the first 10 months of 2009, according to latest figures provided by the International Lead and Zinc Study Group (ILZSG). The World Bureau of Metals Statistics (WBMS), on the other hand, sees a zinc surplus of 129,000 tons for the January-October period.

The ILZSG report says global refined zinc use was 8.831 million metric tons in the January-to-October period, down from 9.695 million metric tons a year earlier. World refined zinc output was 9.234 million metric tons, down from 9.761 million metric tons in the same period last year. Additional data from ILZSG shows October producer stocks fell to 328,000 tons from 329,000 tons in September, although they are still up from the 366,000 tons seen in September of 2008.

Copper +1300,

Aluminum +12100,

Nickel +834,

Zinc -350,

Lead +350,

Tin +180

Copper +2475,

Aluminum +19775,
Nickel +930,
Zinc -250,
Lead +650,
Tin -10.

For a commodity player, any rise in the commodity price has a multiplier effect on earnings, depending on its operating margin. The recent rally in zinc prices seems to have a similar effect on Hindustan Zinc and a further cascading impact on its stock prices. Zinc prices on the London Metal Exchange (LME) have increased by more than one-fourth within a span of three months.

This is definitely good news for the shareholders of Hindustan Zinc which is otherwise fundamentally quite sound. Thankfully, the rupee has not appreciated much against US dollar during the same time period, which will otherwise have brought down the realisation in rupee terms. The rupee appreciated only by 2.5% during this period. What this implies is that Hindustan Zinc must have realised higher prices on its products in the past two months.

The company reported an operating margin of close to 68% in the September 2909 quarter, an improvement of around 1,400 basis points sequentially. Zinc prices rose by a little more than 25% in that quarter. With the current rise of around 21% in commodity prices, the operating margin could rise somewhere between 73% and 76% in the December 2009 quarter, depending on other by-product realisations.

Considering the continuous signs of economic recovery in different parts of the developed world, there may not be any significant fall in zinc prices from here onwards. According to a report of international lead and zinc study group (ILZSG), the global demand for zinc in calendar year (CY) 2010 is expected to grow by 11.9% compared to the 5.6% decline expected in CY09.

The supply is also expected to be slightly below demand and this may exert some downward pressure on zinc prices. However, there are other factors such as the movement of dollar, the economic recovery in the developed world and demand from China which will be crucial in determining prices. Commodity experts are of the opinion that there may be little correction in short-term before zinc prices bounces back again.

Factory output in the world’s biggest metal consumer climbed 19.2 percent from a year earlier, the statistics bureau said. That exceeded the 18.2 percent estimate in a Bloomberg News survey. Imports of copper and related products jumped 10 percent since October, the customs office said.

“The bottom line is we think underlying consumption is booming,” Max Layton, an analyst at Macquarie Bank Ltd. in London, said by phone.

Copper for March delivery rose 4 cents, or 1.3 percent, to $3.1425 a pound on the New York Mercantile Exchange’s Comex unit at 8:25 a.m. The contract retreated 2.9 percent this week. JPMorgan Chase & Co. raised its 2010 copper forecast to $3.22 a pound, from $2.70 previously.

Copper for three-month delivery gained 1.4 percent to $6,880 a metric ton on the London Metal Exchange.

Expectations of revived demand as economies emerge from recession, along with a weaker dollar and record first-half imports into China, helped copper to more than double this year.

Copper stockpiles in Shanghai dropped to the lowest in two months, fueling the first gain in Chinese prices in three days. Inventories monitored by the Shanghai Futures Exchange fell 8.6 percent to 95,676 tons this week, the exchange said. That’s the lowest level since the week of Oct. 5.

Lower Stockpiles

The drop in stockpiles was “bullish on a two-to-three- months view,” Layton said.

Stockpiles tracked by the LME gained for a 29th day, up 1 percent to 466,075 tons. Canceled warrants, or metal booked for removal from warehouses, slumped 33 percent to this year’s low of 700 tons yesterday. Earmarked metal now accounts for less than 0.3 percent of total LME inventories, down from the 2009 high of 21 percent in May.

Among other LME metals for three-month delivery, aluminum rose 2.4 percent to $2,255 a ton. The contract reached $2,259 earlier, the highest price since Oct. 15, 2008.

Canceled warrants in LME-monitored warehouses have jumped 47 percent this month and now account for 3.9 percent of total stockpiles, compared with 0.5 percent at the start of the year.

“We remain skeptical about aluminum prices in the medium term,” Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt, said in a report. Prices rose partly because 50 percent to 75 percent of LME-monitored stockpiles were judged to be tied up in financing deals, he said.

“The material should re-enter the market over the next few months,” Weinberg said. An increase in Chinese aluminum production in November and rising stockpiles in Shanghai, now at the highest level since 2003, may also hurt prices, he said.

Nickel rose 2.3 percent to $16,645 a ton, zinc gained 2.3 percent to $2,322 a ton and lead advanced 2.2 percent to $2,325 a ton. Tin fell 0.7 percent at $15,200 a ton.

Copper prices slipped below the $7000 mark on Tuesday, taking cues from the stronger dollar and a rise in inventories. Yesterday, copper inventories rose 750 tonnes and may continue to rise as fresh inflows in Korea are rising. China is re-exporting its ample oversupply of the metal in to LME listed Asian warehouses.

On the macroeconomic front, the Dollar Index strengthened on Tuesday as risk aversion in the financial markets led to demand for low-yielding currencies. The currency closed above the 76 mark as investors opted for safer investments. The Dow Jones closed lower by 107 points yesterday and this showed that investors remained wary about the economic recovery. Renewed fears over deteriorating credit ratings in US and UK benefited the Dollar Index as risk aversion loomed in.

Aluminum prices could trade with a positive bias on news that that the global aluminum surplus will narrow by 54% in 2010 from this year in China. The surplus of primary aluminum will narrow to 1.19 million tons from 2.57 million tons. Aluminum prices could trade with a positive bias today.

On the macroeconomic front, the Dollar Index could strengthen and trade with a positive bias as risk aversion could continue to raise demand for the low-yielding dollar. This could put base metal prices under pressure.

Copper
Copper prices are sideways with immediate support for MCX February contract seen at Rs.324.60. Further below, crucial support is seen at 322 levels.

Whereas resistance is seen at Rs.331.40 levels & further upwards at Rs. 335 levels.

Zinc
Zinc prices are sideways with immediate support seen at Rs.106.05 levels for MCX December contract whereas crucial support is seen at Rs.104.65 level. Short-term resistance is seen at Rs.108.90 whereas major resistance is seen at Rs 110.05 levels

At the MCX, copper for delivery in February contract moved down by 0.65 per cent at Rs 328.25 per kg in turnover of 2,958 lots. The metal for delivery in far-month April contract also shed 0.63 per cent to Rs 330.25 per kg in turnover of 142 lots.

Meanwhile, three-month delivery copper at the LME fell 0.07 per cent to USD 7,075 per tonne, while Shanghai’’s copper went down 0.31 per cent to 55,510 yuan per tonne in the morning trade today. Market analysts attributed weakness in metal at the futures market to overnight losses at the LME as weak US services sector data raised concerns over global economic recovery and rise in inventories.

Meanwhile, copper inventories at LME rose by 2,400 tonnes to 445,400 tonnes.

Votorantim Metais Brazil has agreed a long-term sales contract with LN Metals International Ltd for deliveries in 2010 for a significant proportion of the company’s Tocantins brand export tonnage in cobalt metal.

For any new terminal market contract to gain traction physical material has to be priced basis the exchange formula. Votorantim’s decision is a significant development and reflects keen interest in the physical industry to take advantage of LME pricing and the Exchange’s other services.

The Brazilian company is one of a number of producers that has applied to list its cobalt brand. Others include Jinchaun Group, Sumitomo Metal Mining Co and Vale Inco.

The LME cobalt futures contract begins trading on February 22nd, 2010

December copper was 4 cents lower to $2.96 per pound in New York, while three-month contracts on the LME dropped $40 to $6,530 per tonne on the session.

Inventories were up by 5,775 tonnes during the day to 379,825 tonnes.

Aluminium stockpiles, on the other hand, were down by 2,300 tonnes in LME warehouses, sending that metals prices $4 higher to $1,925 per tonne as some analysts forecast that aluminium inventories are already past their peak and on the way down.

Zinc and lead each saw prices drop by $10, to $2,219 per tonne and $2,350 per tonne respectively, while nickel added $140 to $17,760 per tonne in London.

Meanwhile, among precious metals, December gold added $2 to $1,089.30 per troy ounce and December silver was up a cent to $17.41 per troy ounce, but January platinum dropped $6.40 to $1,362.90 per troy ounce