METALS INSIDER: Eastern promise lightens Western gloom

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

By Andy Home
LONDON, Oct 9 (Reuters) - The LME industrial metals have
recently been languishing at historical lows with sentiment in
thrall to the dual financial and manufacturing crisis gripping
large parts of the developed world.
That crisis is still unfolding with governments fighting to
prevent banking and real economy meltdown combining in a
negative feedback loop.
The U.S. government started off the week injecting more
taxpayers' funds into AIG , the giant insurance company
deemed "too big to fail". By the end of the week, the focus had
shifted to General Motors , fast running out of cash and,
in the views of many, also "too big to fail".
Jobs are bleeding across the G7 board and after exhausting
interest rate policy, central banks such as the Bank of England
have moved to "quantitative easing", an unproven strategy for
reinvigorating still moribund credit markets.
This Western macro picture is not going to change any time
soon.
Norbert Ore, chair of the Institute for Supply Management,
which takes the monthly pulse of the U.S. manufacturing sector,
said there will be no manufacturing recovery in the country
until there is an improvement in the housing and automotive
sectors. "They're so pervasive. They spill over into a lot of
other industries," Ore said.
Unfortunately, these are the twin points of maximum weakness
in the global manufacturing picture. Economists may be reluctant
to draw the analogy between the current crisis and the Great
Depression of the 1930s but one automotive analyst last week had
no such qualms.
"In our view, we are in an automotive depression," said
Standard & Poor's equity analyst Efraim Levy.
"Depression" in such a key end-use sector for industrial
metals spells only more trouble for already collapsed demand.

EASTERN PROMISE
However, in the last few days this all-pervasive gloom has
been penetrated by a ray of eastern promise in the form of
China.
Official pronouncements from Beijing, such as the
affirmation by Chinese Premier Wen Jiabao that the country will
meet its 8 percent growth target this year, may ring hollow to
many non-Chinese listeners.
But what is not in doubt is the country's aggressive
restocking of metals, most particularly copper. Imports have
been running strong since September last year and the consensus
is that they will remain strong for at least a couple more
months.
What started as bargain-basement buying by the commercial
sector has spread to the official sector with the government's
secretive stockpile manager, the State Reserve Bureau, thought
to have contracted the bulk of a 300,000-tonne purchase
programme. It may only be the first tranche of an even bigger
restocking exercise.
The scale of the dragon's hunger for the red metal has
impacted the LME market much quicker than had generally been
expected. LME warehouses in Asian locations are rapidly being
cleared out with the focus now shifting to European locations.
The previously inexorable rise in LME stocks of copper has
been broken and further falls look on the cards, judging by the
recent explosion in warrant cancellations, a useful indicator of
future draw rates.
This unexpected bull driver has put bears on the defensive.
The "black box" community of CTA technical funds has been
steadily paring its short exposure on the London market but the
process accelerated last Wednesday with the upside breach of the
100-day moving average at around $3,560 per tonne.
By the end of the week the collective short positioning was
below 30 percent of historical capacity, according to London
fund-watchers. That's the lowest it's been since the first days
of September.
Strength in copper, the LME's bellwether contract, acted
positively on some of the other metals last week, zinc and lead
in particular. Both also broke back up through their respective
100-day moving averages and like copper ended Friday in the
black relative to the previous week's close.
Zinc too has seen accelerating LME warrant cancellations
with the result that almost 13 percent of total metal in the
system is now earmarked for physical departure. As with copper
there is little doubt on "the street" that the metal will head
for China.
Lead stocks never saw the same sort of accelerated build as
was seen in the other metals over the northern hemisphere winter
months, leaving the heavy metal ripe for contrarian plays.
Nor did tin, which remains the contrarians' favourite. The
LME market remains firmly backwardated, the benchmark
cash-to-three-months period valued consistently at over $200
backwardation last week.

WESTERN PAIN
Copper's revival of fortunes hasn't been of much help to the
laggards of the LME complex, namely aluminium and nickel.
These two continue to suffer from high and still-rising LME
inventories, an all-too-visible sign of the awful fundamental
dynamics in both markets.
Both are still characterised by producer pain. Century
Aluminium idled more production capacity last week,
this time at its Hawesville smelter in Kentucky, while nickel
producer Albidon mothballed its new Munali mine in
Zambia.
The consensus remains that production cuts in both metals
are still lagging the speed of demand destruction and the
"street" is looking for more supply-side response in the coming
period.
However, all eyes will again be on copper this week. It is
the pack leader and it is the metal that is most bewitched by
China's attempts to de-couple from Western recession.
The first snapshot of China's copper imports in February
will be out in the next few days. They are expected to be very
strong. Even more critical, however, will be developments in LME
copper stocks with the "street" keeping a close eye on the pace
of warrant cancellations as a gauge of China's continued
appetite for units.
Any sign of the downtrend in LME copper stocks losing
momentum, however, and there will be no shortage of bad news
around which retreating bears can rally and reassert their
previous control on the market.

LME three-month valuations on Friday and weekly changes:
Close Change on Week Pct Change
Aluminium $1,310 -$32 -2.4
Copper $3,720 +$271 +7.9
Lead $1,220 +$174 +16.6
Nickel $9,850 -$150 -1.5
Steel FE $315 +$55 +21.1
Steel Med $282.5 -$12.5 -4.2
Tin $11,250 +$325 +3.0
Zinc $1,230 +$102 +9.0
(Editing by Anthony Barker)
((andy.home@thomsonreuters.com)
Keywords: COLUMN METALSINSIDER/

(C) Reuters 2009. All rights reserved. Republication or redistribution of
Reuters content, including by caching, framing or similar means, is expressly
prohibited without the prior written consent of Reuters. Reuters and the Reuters
sphere logo are registered trademarks and trademarks of the Reuters group of
companies around the world.

nL5607407
AHOME/