LME MORNING - Base metals drift lower, further consolidation expected in PM sessions

By: Kathleen Retourne

London 01/12/2011 - Base metals paused from breath during Thursday morning trading, drifting lower after an explosive rally on Wednesday afternoon.

Poor Chinese manufacturing data put the brakes on gains as did economic sentiment, which took another turn for the worse.

In the eurozone, Spain and France are set to sell as much as 8.25 billion euros of government bonds today - fears that this will paint a starkly glum picture of the eurozone economy has sent European stocks slipping. The euro stepped back from yesterday's one-week highs to 1.3483 against the dollar.

"The market is overdone on the upside, and as this news gets digested we'll see the market settle back somewhat to consolidate. This rally is surely unsustainable given the catalogue of events in recent months," a trader said.

China's manufacturing contracted in November for the first time since 2009. HSBC final manufacturing PMI came in at 47.7, against 48.0 the previous month. CFLP manufacturing PMI was also down at 49.0 against a forecasted 49.8.

"Such heights having been gained yesterday, it is hardly surprising that we are seeing profit-taking this morning. Prices are also slipping as a result of a poor Purchasing Managers' Index for the manufacturing sector in China which for the first time since February 2009 fell below the 50 mark again," Commerzbank said.

The explosive rally on Wednesday was triggered by a concerted effort by six of the world's major central banks to cut the cost of emergency funding for European banks, which boosted the confidence of investors that the eurozone debt crisis would not be allowed to spin out of control.

The surge in positive sentiment was further reinforced after the People's Bank of China cut the country's reserve requirement ratio by 50 basis points in a clear shift to loosening the money supply after a long cycle of monetary tightening.

"Shorts ran for cover yesterday after the central bank announcement, with aggressive movement of the like we haven't seen for a while," the trader said. "Clearly, the market was biased towards the negative, which exacerbated the short-covering to see copper touch $8,000 per tonne."

EU manufacturing PMI came in at 46.4 as expected but remains well below the 50 level that represents the difference between contraction and expansion.

"In terms of price direction for the sector, the following days will be important as yesterday's rebound - if confirmed - may lift some markets back above the recently broken trend lines," Credit Suisse said.


Copper spiked to a high of $8,000 yesterday but failed to hold this level. It has slipped back to $7,820 per tonne this morning, down $75.

Warehouse stocks rose for the first time in five days, increasing a net 75 tonnes to 386,700 tonnes, while cancelled warrants dropped 650 tonnes to 23,475 tonnes.

Nickel stocks rose for the eighth consecutive day, up 684 tonnes to 91,074 tonnes, the highest since October 14, while cancelled warrants were down 36 tonnes to 2,604 tonnes.

The metal had broken through technical support at $16,800 during Wednesday morning trading before going on to close at $17,500 after the afternoon rally. But price have since tailed off, dropping to $17,150, a loss of $350.

Aluminium inventories at 4,557,650 tonnes fell 2,700 tonnes and cancelled warrants at 172,425 fell 3,200 tonnes. The metal is currently at $2,110, unchanged from Wednesday's close.

"Despite the low aluminium prices, there is no end in sight to the high surpluses on the global aluminium market," Commerzbank said. "Chinese state research institute Antaike estimates that China will next year show a supply surplus of 250,000 tonnes."

This would mean greater production growth than was previously expected, with gains of 12 percent to 21.95 million tonnes, exceeding even this year's very high growth rate.

Lead prices were supported by cancelled warrants, which saw a notable spike of 11,050 tonnes to 34,375 tonnes due to Detroit cancelling 10,125 tonnes, while warehouse stocks at 369,250 dropped a net 575 tonnes to 369,250 tonnes. The metal dropped just $5 to $2,105.

Tin inventories fell 340 tonnes to 12,150 tonnes and cancelled warrants dropped 285 tonnes to 2,135 tonnes. An export ban, which has been in place since October, has been partially lifted, with the Indonesian Tin Association reporting that domestic smelters will export 800 tonnes of metal to Singapore this week.

This follows PT Koba Tin's decision not to comply with the restrictions - the company shipped 400 tonnes of tin last weekend. The metal is currently at $20,500, down $400.

"The ITA's tin export moratorium is now looking increasingly fragile and a normalization of the Indonesian export flow before the year-end is becoming more likely," Credit Suisse said.

Zinc stocks increased 1,500 tonnes to 741,350 tonnes, while cancelled warrants slipped 1,200 tonnes to 40,000 tonnes. Business at $2,045 is down $27.

(Editing by Mark Shaw)