Metals - Copper rises in line with strong Asian session, higher equity markets

LONDON (Thomson Financial) - Copper rose in line with a strong trading session in Asia, boosted by hopes of resurgent Chinese consumption, and as higher equity markets and a record gold price lifted sentiment.

Fund index rebalancing also fuelled buying.

A stronger session in Asia, boosted by buying ahead of the Chinese New Year on Feb 7 and signs of lower inventory from the Shanghai Futures Exchange, helped lift copper's value. China is the world's top consumer of the red metal.

'Solid underlying Chinese copper demand and a tight spot physical market supported Asian buying overnight,' said Barclays Capital analysts in an email. 'Meanwhile, the recent large increases in LME cancelled warrants suggests that LME inventories are about to start falling.

Cancelled warrants have been rising over the past few days and now comprise 7.8 pct of total stocks - the highest since mid-Sept 2006.'

Cancelled warrants represent pledges to take delivery of metal, and so squeeze supply.
Rebalancing, which sees funds realign the proportions of oil, metals and other commodities held in their index, is also benefiting the metals, analysts said.

At 1.17 pm, LME copper for three-month delivery was up at 7,120 usd per tonne against 6,915 usd at the close yesterday.

But while equity markets were up today, there are still concerns wider economic weakness could dent global physical demand. Analysts will keep a close eye on data, including both physical metal consumption figures and US economic numbers, to assess the impact of the credit crunch.

'Physical activity has yet to pick up,' said UBS analyst Robin Bhar. 'Once the investment interest has subsided there is a risk of a downwards price correction in the absence of an increase in physical demand.'

While index rebalancing was helping copper's price-rise this morning, he added, the red metal, 'is not going to be the one that's most heavily influenced -- it will be the smaller contracts like zinc and nickel'.

Analysts expect contracts that trade in smaller volumes to benefit the most as prices for those metals are expected to rise.

'Market watchers are predicting that once rebalancing is done the market will fall away as fresh shorts who have taken advantage of the index buyers have sold into the strength and volume and will then follow equities lower in a market led by recession fears,' warned Alex Heath, head of metals trading at RBC Capital Markets.

In other metals, three-month nickel was up at 29,075 usd per tonne from 28,205 usd per tonne at the close yesterday.

'Prices have risen markedly again on re-weighting of index fund portfolios and probable strong demand from stainless steel producers,' said Fairfax analyst John Meyer. 'There is, however, some debate over a potential overhang of stainless steel in the world market although we believe any surpluses should be taken up relatively quickly.'

Nickel has lost almost 45 pct in value since hitting a record of nearly 52,000 usd per tonne in May of last year because of demand destruction at higher prices and as stainless steel producers have been using less of the metal.

In other metals, tin for delivery in three months was up at 16,425 usd per tonne from 16,210 usd, while lead was trading at 2,600 usd per tonne against 2,590 usd. Aluminium edged up to 2,489 usd per tonne, basis three months, from 2,469 usd and zinc to 2,540 usd per tonne from 2,490 usd.

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