METALS INSIDER: How do you like your recovery? Hot or cold?

-- Andy Home is a Reuters columnist. The opinions expressed are
his own. For more Metals Insider columns, top Reuters metals
stories and third party content, please visit the free Base
Metals Community website at (www.metalsinsider.com) --

By Andy Home

LONDON, May 5 (Reuters) - Global equity markets were on a
charge last week, officially entering bull territory, defined as
a 20-percent rise from the lows, with risk appetite surging
anew.

Not even a global flu pandemic or the slide into bankruptcy
protection by Chrysler could dent the collective euphoria that
the global economy has now turned the corner and is on the road
to recovery.

Key industrial metals have already raced ahead of stock
markets in their anticipation that the worst is over. Copper
continues to sizzle, three-month metal closing last Friday with
year-to-date gains of almost 50 percent. Lead is not far behind
with a 40 percent rise.

Even aluminium, a market that is in palpable structural
oversupply, has managed to haul itself off the lows and return
to year-start levels.

Close Chg on Week Pct Chg Pct Chg on Year
Aluminium $1,539 +$82 +5.6 -0.1
Copper $4,600 +$130 +2.9 +49.8
Lead $1,400 -$35 -2.4 +40.1
Nickel $11,900 +$350 +3.0 +1.7
Steel FE $345 +$15 +4.6 +3.0
Steel Med $340 +$5 +1.5 -10.5
Tin $12,450 -$150 -1.2 +16.4
Zinc $1,515 +$95 +6.7 +25.4

China has provided the physical support for these early-2009
advances in the form of a massive buying spree. The flood of
metal into the country since the start of the year has capped
or, in the case of copper, reversed the build in visible surplus
even as demand in the rest of the world has suffered a
catastrophic collapse.

THE ILLUSION OF V

China is also the lynchpin of the broader view of global
economic recovery. After contracting sharply at the end of 2008
manufacturing activity is now once again expanding, according to
both state and private purchasing managers indices.
[ID:nPEK78002]

This was always part of the recovery script. China, everyone
knew, was going to do whatever it took to maintain the level of
economic growth dictated by Beijing.

Moreover, by targeting domestic demand with a massive fiscal
stimulus programme, the chances are good for China to engineer a
"hot," V-shaped recovery, where activity bounces back just as
strongly as it fell.

And if it's working in China, why not the rest of the world?

The markets are full of spring exuberance, seizing on the
first "green shoots" to convince themselves that others will
effortlessly follow China's lead.

This great green shoot hunt involves some decidedly
selective use of the hard facts and figures.

So don't worry that the US economy contracted at a much
worse than expected 6.1 percent in the first quarter. Focus
instead on the fall in inventories and the resilience of
consumer confidence in the world's largest economy.

Don't worry that Japan is sliding back into deflation. Look
instead at the 1.6-percent rise in March industrial output (and
please don't mention the fact that output was still down by 22
percent quarter-on-quarter in the first three months of the
year). [ID:nT364663]

Focus on the promise that Chapter 11 bankruptcy protection
will be a swift and bloodless means of transforming the fortunes
of Chrysler, not on the company's idling of its entire
manufacturing base during the restructuring process.
[ID:nN01307551]

And ignore those official doomsayers, like the IMF, with
their warnings of a long and deep global recession.

Recovery, so the stock markets will tell you, is here and it
will be "hot."

THE THREAT OF W

Except that there are some worrying signs in the world of
metals that recovery will not be very hot at all.

After rising across the board since the start of April most
of the LME metal markets look in danger of losing that upside
momentum as they search for evidence that a recovery really is
underway.

Confidence is being undermined on two fronts.

Firstly, there is a growing realisation that China's
absorption of metal surplus cannot last forever.

Imports can be expected to remain super-strong for at least
another month or two but there are signs that the state
stockpile manager, the State Reserve Bureau, is backing away
from current high prices.

Commercial sector re-stocking in China is also expected to
run its course after the traditionally strong second quarter and
there should be no danger of manufacturers not having enough
metal to meet orders after the buying frenzy of recent months.

Secondly, no-one seems to be expecting much of a recovery in
metals demand in the rest of the world, judging by the string of
downbeat statements coming out of the Q1 financial reporting
season.

"No substantial improvement in demand for metal products is
expected in the coming months and there continues to be
significant uncertainty regarding the timing of an eventual
recovery," said Norwegian aluminium producer Hydro in its
results. It is looking again at whether to close down further
capacity, primarily at the Neuss smelter in Germany.
[ID:nLT489246]

French nickel producer Eramet warned that "market conditions
remain extremely difficult" and that it expected to record a
"very significant" operating loss for the first half of the
year. [ID:nLU592802]

Interestingly, Chinese companies are no more optimistic than
their Western counterparts. "Demand for domestic steel products
is weak with no change in the situation of steel supply
exceeding demand, while exports are falling remarkably," said
Baosteel, the country's top producer, after posting a 97.7 per
cent drop in first quarter net profit. [ID:nSHA72648]

Even the normally ebullient Lakshmi Mittal, head of steel
giant ArcelorMittal, held out the prospect for only a "technical
recovery" in the steel markets. In the interim the group's steel
capacity will continue to run at around 50 percent over the
course of the current three-month period. [ID:nLS823057]

Not a lot of "green shoots" here and that's significant
because, if a global V-shaped recovery is underway, metals
producers should be among the earliest beneficiaries given their
close affinity with Chinese recovery and the widespread need by
consumers in other countries to restock ahead of any upturn in
order flow.

The broad message from the Q1 reporting season, however, is
that "technical recovery" could easily give way to renewed
weakness. That would mean that the current upturn is no more
than the middle leg of a W-shaped economic growth pattern.

In market terms, it's called a dead-cat bounce.

Just don't tell the stock markets…