Copper and zinc both gained on Tuesday as speculators scrambled to buy back short positions ahead of a holiday break in top metals consumer China and as oil prices bounced back. The lack of clarity ahead of the Chinese new year and a US central bank meeting led investors to cancel some of their heavy bets on lower prices, said Robin Bhar, head of metals research at Societe Generale in London.
"The uncertain environment, with a lot of turmoil across all asset classes, is making participants keep their cards close to their chest, not putting on risk needlessly," Bhar said. "Illiquidity ahead of the Chinese new year is playing an increasing part, so you're probably getting some squaring up heading towards that period."
LME metals seemed to brush off a tumble of more than 6 percent in Chinese shares and as oil prices rebounded, key levels on metals market were hit, which triggered further buying and short-covering, a trader said. Some of the buying in zinc and copper was from commodity trading advisers running speculative investment funds, broker Marex Spectron said in a note. Three-month zinc on the London Metal Exchange was the biggest gainer, jumping 4.9 percent to close at $1,589 a tonne, the highest in three weeks and the biggest one-day gain in over three months. Zinc, which has dipped just over 1 percent this month, rose 0.3 percent on Monday.
Many investors were targeting zinc as the base metal with the greatest potential for shortages after the closure of several mines. Vedanta Resources said on Monday that the final shipment from its closed Lisheen mine in Ireland had departed last week. "We expect the refined zinc and zinc concentrate markets to turn to sizeable deficits in 2016, reflecting the impact of supply rationing," Standard Chartered analyst Nicholas Snowdon said in a note.
Copper finished 2.7 percent stronger at $4,535 a tonne, the highest in more than two weeks. Investors were wary about possible supply issues for copper after news that the Indonesian government is demanding a $530 million deposit for a new smelter from Freeport McMoRan Inc before renewing the US company's export permit for copper concentrate. Aluminium lagged the rest of the metals, ending 1.3 percent firmer at $1,495 a tonne.
Colin Hamilton, head of commodity research at Macquarie, said despite strong demand last year, global aluminium inventories rose by about 1.7 million tonnes. "The aluminium market cannot keep building inventories at such a rate, and more aggressive supply cuts are needed," he said in a note. "In order to keep this supply offline, in our view a sub-$1,400/t LME aluminium price will be needed through the end of the decade." Lead closed 1.8 percent higher at $1,651, nickel ended 1.4 percent stronger at $8,670 and tin surged 3.7 percent to a three-week high of $14,150.
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