LME MORNING - Metals rally on dip-buying, tin sets fresh record on supply worry

By: Martin Hayes

London 26/01/2011 - Base metals advanced during LME trading on Wednesday morning, with bargain-hunting buying emerging in the wake of Tuesday's sharp sell-off, when several metals fell to their lowest since last December.

A dip in the dollar also provided some support for the relief rally, although the mood in the complex remains jittery, while significant warehouse inventory increases for some were a reminder of dull short-term fundamentals.

On Tuesday, copper, lead, aluminium and zinc all tumbled to their lowest since last December amid spells of CTA selling and systems-based liquidation, with chart and fundamental pressures building up. Only tin has consistently bucked the trend, with prices setting the latest in a string of all-time highs.

Sentiment in recent days has been undermined by concerns over economic activity in the eurozone and continued fears that leading consumer China will tighten monetary policy further.

In the short term, metals are expected to remain volatile, given both the current moodswings in financial markets and the lack of solidity in buy-side dips - these are becoming increasingly shallow.

"From a purely seasonal perspective, January tends to be weak for industrial metals," broker Credit Suisse said. “Sentiment could improve again in February and March.”

Typically, the run-up to the Chinese New Year holiday on February sees activity and offtake from China, the world's biggest consumer of base metals, dwindle.

Data flows today will largely be light in Europe and the US, although new home sales for December are scheduled for release later today. They are seen rising to 300,000 units from 290,000 in November.

The main economic event will be the outcome of the FOMC meeting this evening. While no change to interest rates is expected, traders will be looking to Federal Reserve chairman Ben Bernanke's statement for signs of change to quantitative easing, and whether the $600 billion QE2 programme is sufficient or whether more is needed.

"Whether the metals have pulled back enough to tempt sufficient bargain-hunting support remains to be seen. But given the scale of long exposure, the likelihood is the metals will have to weather more downside in the short-term," FastMarkets analyst James Moore said.


Tin was the exception to the overall trend - after hitting a fresh all-time high of $28,698 per tonne, it settled at $28,580, up $385. Heavy rains and floods caused by La Nina weather conditions have affected tin mining operations in Indonesia, curbing supply from the world's leading exporter of the metal.

Despite rising LME inventories, 2011 is expected to see a supply shortfall. Today, stocks climbed a net 155 tonnes to 17,705 tonnes, the highest since June 30, 2010.

Lead was trading at $2,364, up $29 after rallying from Tuesday's low of $2,327, its weakest since early December. But inventories continue to rise heavily - up a net 4,000 tonnes to a fresh high for nearly 16 years of 275,300 tonnes.

Since the start of the year, stocks have soared 32 percent, with hefty warrantings reflecting the current squeeze, although this is starting to ease.

This morning, the sensitive TOM/next (tomorrow/next day) rate was trading at $6.00 and $6.33 backwardation, amid lending guidance. Cash/February, which encompasses the tightness, traded at $25 backwardation, versus $34 yesterday and levels above $50 last week.

Copper rose strongly, recovering from a near three percent decline on Tuesday, trading at $9,371, up $121. It hit a one-month low of $9,236 yesterday.

But stocks rose a chunky 5,625 tonnes to 394,700 tonnes, the highest since September 2010. Cancelled warrants - the metal booked for removal - fell three percent to 28,650 tonnes.

"Prices are up today, as a decline yesterday encouraged investors back into the market on the back of the continued belief that demand will comfortably outstrip supply this year," John Meyer of broker Fairfax said.

Elsewhere, aluminium, which likewise hit one-month lows of $2,360, advanced to $2,394, up $32, with stocks down 4,975 tonnes at 4,536,200 tonnes. Zinc traded at $2,250, up $29, while nickel rose to $26,140, a $240 advance.

Steel billet was quoted at $560/580, with stocks falling 780 tonnes to 54,470 tonnes. Cobalt was steady at $38,000/40,750, while molybdenum was again bid at $38,000.

(Editing by Mark Shaw)