LME MORNING - Metals under pressure as China hikes lending rate

By: Barbara Stcherbatcheff

London 14/01/2011 - Base metals receded on Friday, largely ignoring continued dollar weakness as the Chinese raised reserve requirements for the seventh time since the start of 2009 in the latest effort to tackle inflation in the world’s top metals consumer.

A ceiling appears to have formed over base metals prices over the past week, with trade volatile as bellwether copper came within $50 of its lifetime high, while nickel climbed 5 percent to an eight-month high and tin peaked above $27,000 per tonne.

“We get the feeling that consumers are not prepared to chase prices higher here and with prices apparently capped it suggests there is some producer selling around too,” William Adams, analyst at FastMarkets, said on Friday.

The euro’s surge against the dollar did nothing discourage profit-taking, as the currency continued to bounce off four-month lows below 1.30 hit earlier this week following successful sovereign debt auctions in Spain, Italy and Portugal. 

On Friday, the complex was weighed by news that Chinese authorities raised lenders' required reserves by 50 basis points, as policymakers attempt to battle inflation in their red-hot economy. 

Equally, inflationary fears were expressed on the opposite side of the world during Thursday’s European Central Bank meeting, when ECB President Jean Claude Trichet stated that keeping inflation in check remains a top priority this year despite the active sovereign debt crisis.

However, the IMF stated this morning that Europe is not in a position to put to bed the scepticism over debt in the region in the near future, according to broker Fairfax.

Friday’s economic agenda brings more key data across Europe and the US, with CPI and retail sales due at 13:30 GMT, while Michigan sentiment and business inventories are due later in the afternoon.

ROOM FOR SPECULATION

Some analysts believe that while precious metals appear to be overbought, this is not the case yet for industrials. 

“Perhaps the future is that the ‘bet’ in favour of inflation shall be to be on grains, and base metals, and energy and sugar [et al] rather than solely upon gold,” Dennis Gartman, author of the Gartman Letter, said on Friday. 

He argues that while gold has “run its course,” with charts looking tenuous as the metal has become “over-involved in by the public and by large speculators alike,” copper has not.

But other experts see the potential for the downside mounting, with evidence that commodity options traders have increased bearish bets against metals and energy funds after a two-year rally. 

Bloomberg reported that the number of puts to sell the iShares S&P GCSI Commodity-Indexed Trust doubled this week to a record 18,797 contracts, bringing the ratio of puts to calls to a three-year high of 3.28-to-1.

Copper traded at $9,581, down $39, while stocks fell a net 1,125 tonnes to 376,225 tonnes.

Aluminium bucked the trend, trading up $3.75, while stocks rose only 50 tonnes, tiny compared with the five-figure increases that have been recorded four out of five days this week. Stocks are currently at their highest since September 1, 2010, with a pile of 4,435,000 tonnes, while inventories have risen almost 5 percent in the past week, suggesting financing deals are being unwound.

Nickel traded at $25,475 per tonne, down $75. Nickel gave a particularly strong performance on Wednesday this week, closing up nearly 5 percent higher at $25,800, its highest since May 4, 2010.

Zinc traded at $2,449, down $13, while sister metal lead bucked the trend, trading at $2,637, up $2.  

Tin traded at $26,775, down $75, while stocks rose 80 to 17,250, the highest since July 2010.

Steel billet was indicated at $575/590, while inventories were stable. 

“The supply side is likely to tighten because of the flooding in Queensland, Australia, either directly in terms of base metals production in the area or indirectly via disruptions to its coal exports, which in turn affects metal production in other areas such as China,” Adams said on Thursday.

In the minors, cobalt was indicated at $38,000/39,462, while molybdenum was indicated at $36,800/40,000.

 

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