LME MORNING - Metals lose steam as dollar recovers, lead hits one-month low despite raging tightness

By: Martin Hayes

London 24/01/2011 - Base metals, steadier initially on the LME on Monday, reverted back from their peaks during morning trading to turn mostly lower.

The complex remains nervy after last week's heavy sell-off and faltering as the dollar starts to regain upside momentum.

Lead fell sharply to one-month lows as inventories rose again, with the forward market decoupled from raging nearby tightness and steep spot backwardations. Copper was the exception - it managed to hold gains after briefly spearing below $9,300 last week in a five-percent retracement from the new all-time high of $9,781 per tonne.

The dollar was recovering against the euro - after slipping to 1.3622 at one stage, it recently settled around 1.3580.

"Underlying bullish trends do seem to be dominating still and as long as there are no developments to upset overall confidence, the upside seems to be the way ahead," William Adams of FastMarkets said. “But we can’t help but believe a lot of good news must already be priced in at these levels.”

The buy-side interest is largely flowing from investment money while actual consumer interest and physical offtake remains slow - in copper, key consumer China has been largely absent from the market for month, with physical premiums in the region having flattened.

"Physicals metals demand is taking a breather as exchange inventories for most metals continue to register minor inflows," broker Credit Suisse said. “However, beyond some seasonal moderation, we expect base metals consumption to remain robust and prices to have further upside.”

Short-term consumption trends will be slack in the run-up to the Chinese New year holiday in two weeks. But the market will also be tinged with caution and prone to further bouts of volatility, given the current concerns over China tightening monetary policy further.

Last week, data on Chinese GDP, CPI, PPI and industrial production underlined the strength of the country's economy, in turn reigniting fears of further fiscal tightening there to avert possible economic overheating.


LEAD NEARBY TIGHTNESS INTENSE, SUCKS IN METAL

Lead fell to $2,385 per tonne, a one-month low, before settling at $2,404, a $21 loss. Prices have been undermined by rising inventories, notably over the past week. Today, stocks were up a net 2,600 tonnes at 266,775 tonnes, the highest since May 1995, with metal being warranted largely against steep nearby LME backwardations.

This morning, TOM/next (tomorrow/next day) - belated business against Friday's cash date - traded out to $9.00 backwardation, with premiums emerging as the dominant long's position has dropped slightly. In other rates, the cash/threes $80/85 backwardation held around $80/85, its widest since mid-October 2007, having virtually doubled from around $43 on Thursday.

The tightness is centred between cash and February - around $55 backwardation after trading at $60 premium on Friday. By comparison, Feb/March is trading at $6.00 backwardation and March/April at $8.50 premium.

Copper was well below early highs around $9,573, easing to $9,490, still above the previous close of $9,441. Stocks edged up as well, rising a net 200 tonnes to 381,500 tonnes, just 250 tonnes below last week's four-month highs.

Aluminium eased $2 to $2,418 but was still holding above $2,400, with stocks dropping 4,375 tonnes to 4,545,950 tonnes. This is possibly a return to trend declines after some big warrantings last week, which reflected warehousing finance operations and metal-positioning ahead of mooted physically backed ETCs.

Elsewhere, nickel traded at $26,219 against a previous $26,175 - inventories fell for the fifth day in a row, down 522 tonnes at 135,174 tonnes. Tin business at $25,700 was down $45 and off an early fresh all-time peak of $27,800, with stocks rising 110 tonnes to 17,405 tonnes, just 15 tonnes below recent six-month highs.

Zinc dropped to $2,305, down $13. Stocks did fall 100 tonnes but at 711,450 tonnes the stockpile remains around its highest since October 2004. Steel billet was indicated at $570/585, up $5.

In the minors, cobalt was quoted at a steady $38,000/39,450, while molybdenum was bid at $36,800.


(Editing by Mark Shaw)

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