Prices of industrial metals rallied on Wednesday alongside equities, but analysts said tumbling demand and rising inventories would sap sentiment and come back to haunt the market. Copper rose nearly 4 percent to $3,437.50 a tonne, aluminium more than 5 percent to $1,410 a tonne, its highest in more than one week, while nickel also gained more than 5 percent to $12,001.
European stocks and Wall Street rose on optimism the new administration in the United States would move quickly to stabilise the ailing banking sector. Benchmark copper on the London Metal Exchange ended at $3,330 a tonne from $3,310 a tonne on Tuesday. Prices of the metal used in power and construction tumbled by more than 9 percent on Tuesday.
"Base metals are tracking equities," said David Thurtell, analyst at Citigroup. "But metal inventories are rising and economic activity continues to slow." Copper inventories in LME warehouse rose 3,125 tonnes to 454,925 tonnes, the highest level late 2003, while aluminium stocks surged to a record above 2.73 million tonnes. "Price rises cannot be sustained.
There is no real fundamental reason why metals prices should rise, unless you are taking a long term - 3, 5, 10 year - view," said Robin Bhar, analyst at Calyon. Traders said a $2-a-tonne backwardation - price premium - for copper delivery tomorrow over the next day from a discount of less than $1 was probably because of a dominant position. Data shows 40-50 percent of warrants on stocks in LME warehouses are held by one entity.
But they added that holidays in Asian markets could fuel wild price swings for the rest of the week as day traders and short term investors try to boost profits by quick forays into the market. Markets are waiting for a decision on monetary policy from the United States later on Wednesday, while the bleak outlook was highlighted by the International Monetary Fund which said the world risked running out of money.
Grim prospects were also a theme in a Reuters survey of price forecasts for base metals. It showed that a deepening recession would slash copper prices by 50 percent this year from last year. Surpluses for both copper and aluminium are expected to surge in 2009 as demand falls faster than production cutbacks, the survey showed. Aluminium, used in transport and packaging, closed at $1,367 a tonne from $1,340 on Tuesday.
"The results from Hydro today certainly highlight the difficulties being faced by the (aluminium) sector," J.P. Morgan said in a note. Norwegian aluminium group Norsk Hydro said its fourth-quarter results would be hit by 3.5 billion crowns ($520 million) of asset and inventory writedowns and it would continue adjusting output to shrinking demand.
A 98.5 percent fall in third quarter core profit due to low metals prices at London-listed Vedanta and worries about Swiss-based Xstrata's debt undermined the optimism, analysts said. Also on the radar was confirmation from miner Rio Tinto that it may issue shares to help pay off $39 billion in debt. Steel making ingredient nickel, a favourite toy for the funds at the moment ended at $11,750 from $11,400. Lead and zinc ended at $1,145 unchanged from Tuesday and tin closed $11,445 from $11,500.