LME MORNING – Bears, bargain-hunters fight out metals’ new direction

London 20/10/2010 - The knee-jerk correlation between the US dollar and metals markets continued to dictate price movements in Wednesday morning business, as metals recovered after their sharp sell-off in reaction to a rebound in the dollar on Tuesday.

The dollar has already started to reverse its gains as investors anticipate the signal for further quantitative easing measures in today’s Federal Reserve meeting.

On Tuesday, the Chinese rate announcement sent metals and global equities tumbling, with China’s move to increase their benchmark rate by 0.25 percent yesterday - its first increase since 2007 - sparking fears that demand from the world’s largest commodities consumer may be stifled. This is primarily a move to fight inflation, but could also lead to a cooldown of the local economy.

With a share of over 40 percent, China is by far the largest consumer of base metals - but they are also critical suppliers, and have used this clout to brazenly declare an export ban of rare earth minerals to Japan and also to US and European customers,  spawning a potential rare earths crisis. 

China – which currently holds a 95-percent monopoly on the production and processing capacity for rare earth metals - may also raise its export quota for rare earths used in electronics, alternative energy and weapons, according to an official who until last week oversaw the industry in the country.

China is not the only wild card in the land of metallics. Metals markets continue to be anxious by the uncertainty surrounding physical base metal ETF’s. So far, aluminium seems the primary contender for the job, partially because the aluminium-based vehicle could absorb some of the inventories that have been built up during the recession and industrial metal ETF on aluminium would be less disruptive to prices than copper or tin, for example, where supplies appear particularly tight.

The greenback was lower at 1.3830 against the euro, following a spectacularly volatile session on Tuesday which saw a range above 1.40 and as low as 1.3727. The greenback may slip further after Ben Bernanke’s October Beige Book is released later today.  Expectations of quantitative easing as large as $500 billion after the US Fed’s November 3 meeting has weighed on the US dollar, which in turn last week pushed the Australian dollar to parity for the first time since it was floated in 1983.

“The Chinese rate hike has proved to be a catalyst that has prompt traders to question their stance / outlook; today’s UK spending review may well be another catalyst as it will highlight that growth is likely to suffer as austerity measures are adopted.  William Adams, analyst at FastMarkets, said on Tuesday. 

On Tuesday, investors will watch closely for developments from the UK as the coalition government will announce a drastic spending review that will involve the loss of thousands of jobs, massive cuts in university funding, wholesale reform of public housing and further cuts to the welfare budget.

ALUMINIUM SUPPLIES ROBUST

Alcoa, the largest aluminium producer in the US, estimates that global aluminium demand will rise by 6 percent per year in the next decade.  Supply is set to exceed demand by 1.3 million tons this year, according to research firm Brook Hunt.

Aluminium, which traded down $3 at $2,351, saw inventories rise 13,500 to 4,329,825 in conjunction with the third Wednesday of the month contract expirations. China’s Jiaozuo Wanfang Aluminium Manufacturing was forced to cut 140,000 tonnes per year, or one-third of its capacity on the power supply shortage with immediate effect.

Copper traded at $8,272, up $12, after teasing the $8,500-level yesterday, but most analysts’ forecast remain optimistic about the near-term. 

“Although we believe that recent copper price rises may not fully reflect fundamentals, the metal remains our top-pick for 2011,” analysts at Bank of America-Merrill Lynch said on Wednesday.  

Copper continues to be heavily influenced by continued structural issues on the supply side, which has seen a steady decline in mine production during the past two decades.

“Treatment and refining charges will in our view remain depressed in the near future, although a slight rise next year is possible, partially because of a potential easing in the scrap market,” they added.

Nickel traded at $23,550, up $90 from last night’s close, while tin traded at $26,300, down $150.

Zinc traded up $16 at $2,408, and lead climbed $18 to $2,418 - stocks rose 75 tonnes rise to 198,225 tonnes.

Steel billet was indicated at $485/497, while stocks fell 1,455 to 57,915 tonnes. In the minors, cobalt and molybdenum were unchanged at $37,000/$38,750 and $31,000/37,450.

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