METALS INSIDER: Strategic buyers defy recessionary chill

-- Andy Home is a Reuters columnist. The opinions expressed are
his own --

By Andy Home

LONDON, Jan 12 (Reuters) - The first days of 2009 have
brought out strategic, long-term buyers of industrial metals in
apparent defiance of a bleak global manufacturing outlook that
continues to deteriorate with every passing day.

Bears have been forced to cede ground. But many are simply
biding their time, convinced that early-year gains are no more
than a false rally.

INDEX BUYERS

Top of the LME agenda last week was the annual rebalancing
of the commodity index funds. The two giants are the DJ-AIG and
the S&P GCSI but there are many replicant indices that need to
re-weight their exposure to specific commodities at the start of
the year.

This is now a well-understood phenomenon on the London
"street", which itself re-balances positions ahead of the
official re-jig commencing Jan 8 (for the GSCI) and Jan 9 (for
the DJ-AIG).

The main beneficiaries within the LME complex this time
around were expected to be copper, nickel and zinc, in that
order, and all three metals were characterized by short-covering
in the closing days of 2008.

The action continued into the first part of this week,
although advances were far from linear as opportunists,
including some producers, sold into the price strength.

The rebalancing exercise by the DJ-AIG, which has a higher
weighting of LME metals than the others, will last through most
of this week. If past years are anything to go by, expect a
convoluted game of hide-and-seek between index buyers and
proprietary traders.

THE "ODD COUPLE"

Neither lead nor tin is big enough to qualify for inclusion
in the commodity indices. But that's not the only reason they
are currently the "odd couple" in the LME pack.

Neither has seen the accelerated stocks build evident in the
other metals, where collapsing demand has created surplus units
that are finding their way to the LME.

Aluminium in particular is suffering from the weight of
stocks build as new surplus is joined by old surplus with
previously hidden off-market stocks being unceremoniously dumped
onto LME warrant in the harsher financing environment.

LME lead stocks, though, ended last year virtually unchanged
and down sharply from their mid-year peak of 101,850 tonnes,
while tin stocks fell by 36 percent over the course of 2008.

Both metals were afflicted by deep-rooted supply problems
last year, a situation that has been compounded by the late-year
collapse in prices, resulting in further producer cutbacks, most
notably Doe Run in the case of lead and Yunnan Tin in the case
of tin.

Both metals are backwardated across the front part of the
forward curve, partly reflecting the existence of dominant long
position-holders.

And both attracted further strategic buying last week as
predators place their bets for 2009. Lead was the biggest riser
of the week, notching up a 10.6 percent gain by its Friday close
at $1,205.

CHINESE BUYERS

Away from the LME another sort of strategic buyer is
emerging.

The secretive Chinese stockpile manager, the State Reserve
Bureau, revealed its intentions just prior to Christmas with a
little-remarked purchased of 30 tonnes of indium, the first time
the Bureau has entered the market for this sort of minor metal.

Since then, it has extended its operations to aluminium,
snapping up almost 300,000 tonnes in the first days of January.

Zinc looks set to be next on the Bureau's shopping list but
the focus of attention is copper, with which the Bureau has had
a long and not always happy relationship.

The Bureau's purchases have so far been made direct from
"national favourites" such as aluminium giant Chalco. All have
more than enough spare metal on hand, judging by local reports,
but copper producers are resisting the bargain-basement price
levels being sought.

The government of Yunnan province, meanwhile, is embarked on
its own stockpile plan, which is a case of subsidizing favoured
producers' own stocks rather than accumulating strategic
reserves in the same way as the national body.

It's worth stressing that both Chinese initiatives amount to
no more than a relocation of surplus metal from market to
government.

FALSE RALLY ?

The Chinese year of the Ox is almost upon us. It symbolizes
prosperity through persistence and hard work and early-year
buyers of the industrial metals will need both characteristics
in bucket-loads if they are to profit from their investments.

Each passing day brings fresh evidence of the recessionary
dynamic that is gripping an ever larger part of the global
economy. Whether it be slumping German manufacturing orders or
rising U.S. unemployment, every macroeconomic indicator is still
pointing in one direction.

Big fiscal stimulus packages such as that announced last
November by China or that proposed by president-elect Barack
Obama in the United States will make a difference...but only
eventually.

Before then global manufacturing will contract further,
metals surpluses will grow and inventories will continue rising.
Producer cutbacks can partly mitigate but cannot reverse the
implosion of demand.

That's why there is still a strong bearish consensus on the
LME "street" with the view that early-year gains are no more
than a false dawn.

Nickel, which was the worst performer last week, is a
reminder that bears will punish any LME metal for over-reaching
itself on the upside.

LME three-month valuations on Friday and weekly changes:

Close Chg on Week Pct Chg
Aluminium $1,570 $0 0.0
Copper $3,400 +$169 +5.2
Lead $1,205 +$115 +10.6
Nickel $12,175 -$1,025 -7.8
Steel FE $352.5 +$17.5 +5.2
Steel Med $365 -$15 -4.0
Tin $11,800 +$175 +1.5
Zinc $1,295 +15 +1.1