Nickel surged nearly 5 percent on Wednesday to a new record high of $42,350 a tonne as tight supply triggered more buying from speculators, traders said.
Copper gained nearly 3 percent and other metals also perked up as wary investors returned to recovering financial markets after the recent sell-off. "Confidence seems to be coming back to all markets," said Adam Rowley, analyst at Macquarie Bank.
"Non-exchange traded commodities like iron ore are still extremely strong. It shows the strength of demand and the ongoing difficulties of delivering supply." Three-month nickel on the London Metal Exchange closed up nearly 4 percent at $42,000/42,005 a tonne, from $40,400 on Tuesday. Prices have risen by around 25 percent since the start of this year.
"There was a burst of fund buying this afternoon," a LME trader said. "The betting is on higher prices ... Low stocks, tight supplies and still very strong demand."
Stocks of nickel, which is mostly used to make stainless steel, in LME warehouses fell 162 tonnes to 3,648 tonnes on Wednesday. But only around 2,274 tonnes - less than one days global consumption - is available for delivery.
"A market deficit is expected in 2007, with continued upside likely from potential output disruptions," Standard Chartered said in a research note. The bank expects LME nickel prices to average $29,875 a tonne this year and $19,500 a tonne in 2008.
Sentiment on financial markets remains nervous, but European shares tentatively recovered and high-yielding currencies stabilised near recent lows.
Stephen Briggs, economist with SGCIB said the turbulence of the past week had been mainly a financial event, but might trigger a deeper move down in metals if it starts to have economic implications.
"Aversion of risk, which leads to much wider credit spreads and so forth, all points to a tightening of monetary conditions, therefore less stimulative conditions and potentially slower growth," he said. "It could still do that."
Copper futures ended up at $6,140 a tonne from $5,965 on Tuesday. Traders took note of a fire overnight at Codelco's 300,000 tonne-per-year Radomiro Tomic plant in northern Chile, which hit production.
But the news did not ignite a buying frenzy as stocks of copper, while still sparse by historical standards, are no longer critically low. Traders said Wednesday's options declaration went through without any fanfare. The focus had been on aluminium as there were a large number of outstanding contracts to buy metal at strikes between $2,900 and $3,000 a tonne.
But as prices are well off that level, those contracts were no longer in play and the metal did not even break $2,700 - where there were some more outstanding contracts - during the morning session before declaration. Aluminium gained to $2,730 from $2,690. Lead gained $30 to $1,850, tin added $275 to $13,600 and zinc ended at $3,360 from $3,310.
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