LME MORNING - Base metals simmer; new gains in euro underpin markets

London, 16 July 2010 - Base metals maintained the week's sideways movement on Friday on the LME, drifting in and out of the minus column as even a stronger euro failed to generate upside momentum, while turnover thinned and the complex watched wider markets for direction.

Copper wound up and down between the $6,630 and $6,680 markers while the rest of the complex was subdued. Aluminium was the exception - it remains close to one-month highs, underpinned by chart-based buying and short-covering.

"The lift in the euro has helped keep things steady," one London floor trader said. "Copper should be traded slightly higher basis that really but very little impetus, I'm afraid."

The euro reversed to a new two-month high at $1.2978, attempting to challenge the $1.30 level. Traders said it looks overbought but, with upside momentum still strong, it may have further to run, which would keep metals on steady footing.

The euro has been boosted by optimism over bank stress tests in the European Union of late as well as a spate of US data that signalled some deterioration in the world's top economy, including June retail sales and several regional manufacturing sentiment indicators.

As well, a slowdown in Chinese growth in the second quarter to 10.3 percent from 11.9 percent in the first has tarnished demand expectations for base metals, muting the impact of a much weaker dollar.

Poor volume and a narrow range tends to indicate a breakout may be forthcoming - underlined by converging Bollinger bands across the metals charts, analyst Jono Remington-Hobbs of FastMarkets said.

"Failure to take out recent highs suggests the break will be lower," he added.

"I'd take a flyer and say the break is to the downside," the trader agreed.

In broader markets, Google's second-quarter results were released late on Thursday. Both net income and revenue rose 24 percent from the previous year but failed to impress investors - earnings missed the target set by analysts. Earlier in the week, results from JPMorgan Chase and chipmaker Intel had started the week on a strong note.

As well, US Congress passed on Thursday the stiffest restrictions on banks and Wall Street since the Great Depression, clamping down on lending practices and expanding consumer protections to prevent a repeat of the 2008 meltdown that knocked the economy to its knees - this could also impede sentiment today. President Barack Obama's signature is expected as early as next Wednesday.

In Asia, stocks fell heavily in Japan with a mixed performance seen in Europe. Gold was flat at $1,207 per ounce. At 1330 BST, CPI data for June is due and seen up 0.1 percent.


Given that copper is in a 50,000-100,000 tonne deficit this year from a surplus of more than million tonnes at one point last year, its market tightness is phenomenal and points to much stronger prices for the fourth quarter and beyond, analyst Max Layton of Macquarie said.

"Sure, prices might come off 10 percent in the near term towards $6,000 per tonne but the muddle-through scenario for the next three months is very bullish. The news will be worse and worse but there will be fewer worries about 2011," he said.

China's rural grid has put out "cracking" estimates for copper demand next year, which, along with supply side tightness, is very bullish for the first half, he added.

"In the absence of any euro sovereign debt default, I think we're looking at a challenge of record highs in the second quarter - if not the first," he said. Copper's most recent record high was $8,940 per tonne from July 2008.

Inventories today fell back for the 21st day in copper with the trend extending across other contracts except for zinc - although this may turn around next week with 'third Wednesday' business.

Stocks of the red metal dropped 1,300 tonnes to 426,425 tonnes, their lowest since 23 November, and business was again unchanged at $6,680 in very low turnover of 2,300 lots.

Tightness in the aluminium date around August/September was indicated at a backwardated $1-$2 spread, slightly easier then last night's valuation at $3.50. Aluminium inventories declined again, reversing Thursday's rare build. Business at $2,026.25 was up $8.25 having this morning at $2,030 challenged Thursday's one-month peak of $2,033.75.

Nickel subsided $50 to $19,350 having closed at $19,400 for the last two days. Inventories here fell a net 492 tonnes to 119,070 tonnes, the lowest since late September today.

Zinc stocks rose 800 tonnes to 617,725 tonnes and are now less than 3,000 tonnes or half a percent from their 2010 high of 620,475 tonnes, a break of which would open the way to peak of summer 2005. Three-month metal was up $18 at $1,828 per tonne.

Lead inventories fell a net 725 tonnes to the lowest since May 21 and business registered a $14 advance to $1,812 per tonne.

Med billet changed hands at $445, its most expensive since 25 June. A break of this level could open the way to levels last seen in late May. Inventories fell 65 tonnes today but cancelled warrants have disappeared.

In the minors, molybdenum at $29,500/33,500 per tonne was $1,050 softer than yesterday, while cobalt, indicated at $36,900/39,100, also slipped from $37,100/40,000 on the close.

(Editing by Mark Shaw)