LME MORNING - Metals prices under fire on demand concerns

London 29/10/2010 - Base metals turned sharply south on Friday morning, with the complex showing losses across the board, as investors speculate that recent price gains may have slowed purchases in China.

Sentiment also grew murky ahead of next week’s Federal Reserve policy meeting.

“Let her sleep. For when she wakes, she will wake the world,” Napolean famously said about China in his era.

Nearly 200 years later, his casual observation has proved eerily accurate, with China’s influence over global markets – particularly, with respect to metals – greater than ever.

“China and other Asia continue to compete with the West for commodities and we see China as potentially becoming a net importer of some key metals in the fourth quarter,” John Meyer, analyst at Fairfax, said on Friday.

But demand could suffer at the wrong price.  On Friday, Chinese equities - the best performer among global markets in October - fell on the prospect the government will intensify measures to curb inflation and property speculation.

Power restrictions in China are having a dramatic impact on metals production in some regions causing the potential for significant shortages in the base metals in China. 

 “A broad section of the real global economy is struggling,” William Adams, analyst at FastMarkets, said.

Copper, which traded at a 27-month high earlier this week of $8,554 per tonne, deteriorated further, trading as low as $8,140, while both and lead and zinc corrected more than 3 percent.

Indeed, the snug relationship between dollar weakness and metals buying may be starting to unravel.  The dollar firmed, trading at 1.3812 against the euro, ahead of a string of economic data that may shape views on the Federal Reserve meeting next week.

This pullback may be temporary, however, with a period of consolidation and sideways trading needed as high prices were outpacing demand.

"Price dips in industrial metals are likely to be short-lived given the increasingly tight market conditions in the sector," broker Credit Suisse said.

Next week, the Federal Reserve is expected to unleash an extensive quantitative easing programme at their November policy meeting worth between $80 billion and $100 billion spread out over several months in an attempt to stimulate the tortured US economy. 

Until this meeting is out of the way, the metals market looks set for further choppy trading, and volatility may increase ahead of next Wednesday's November traded option expiries.

Friday’s data-heavy US schedule brings a host of manufacturing, housing and sentiment data out of the US, including third quarter GDP, the employment cost index, Chicago PMI, CPI, and Michigan sentiment figures.  Economists expect US GDP growth  expected at 2 percent on an annualised basis.

Aluminium demand robust; tin price falls $1,000

On Friday, the Aluminium Association published industry statistics indicating that estimated aluminum demand is running 17.7 percent ahead of last year through to August.

Aluminium was trading at $2,320, down $37, with the market currently ranging between $2,300 and $2,400. Stocks fell 1,025 tonnes to 4,306,350 tonnes, a fresh low since June 2009. There was also an eight-percent jump in cancelled warrants to 202,650 tonnes, with more than 15,000 tonnes booked for removal in Detroit.

Copper pushed below the $8,200 level, trading at $8,165, down $175 from the previous session and the lowest since October 8.  Inventories recorded a net 450-tonne increase to 368,500 tonnes, although cancelled warrants ticked up again, with the metal booked for removal now at 30,050 tonnes, the highest level since mid-September.

Lead traded at $2,428, down $77, while zinc retreated to $2,407, down $87 and 4 percent lower than the previous session. 

Zinc has extended a correction from mid-week 10-month highs of $2,638.75. The trend was accentuated by another big stock increase - up 5,050 tonnes at 621,900 tonnes. Three successive days of stock increases - some 15,000 tonnes - have been due to warranting in New Orleans.

Nickel traded at $22,750 was down from a previous $23,100/23,150 close, while tin fell $1000, trading at $25,250. On Friday, China announced that it will cut the export quota for tin to 18,900 tons from 21,000 tons.

Steel billet was indicated at $485/510, while in the minors, cobalt was indicated at $37,000/39,250, while molybdenum was indicated at $31,000/37,450.

(Additional reporting by Martin Hayes)