LONDON (Reuters) - Recent downbeat sentiment in base metals markets could dissipate and prices spike higher again as tight supply and strong demand combine to squeeze the last drops from a three-year bull run.
The new upbeat sentiment was on display last week as the London Metal Exchange held its annual dinner bringing together thousands of metal producers, consumers, traders and analysts.
"Overall the picture is very strong still," said Kevin Norrish, analyst at Barclays Capital, which has held a consistently positive view toward the sector.
"That has caused a bit of a rethink among some areas of the speculative community that may have come to London thinking that the time to (bet on falling prices) was approaching."
"The picture as far as we are concerned is one of healthy demand and demand picking up, while the supply constraints that have been concerning people for a long time now, remain," he said.
Until the start of this week, base metals had fallen into disfavor with investors after most stormed to record highs in May then plummeted, but since Monday, tin, lead, nickel and zinc have set fresh highs.
"After LME week you often get price surges. Most people are aware we are in a transition toward surplus markets, but the problem is we need metal here and now," ABN AMRO commodities analyst Nick Moore said.
Moore, along with many other analysts, said prices could see one last spike as low levels of metal inventories bite at markets that have proved slow to react to huge price rises since an extended trough between 1998 and 2003.
"Although we can hear the drumming hooves of the cavalry of supply riding to the rescue, they are coming too late.
"The dwindling inventories are being reflected in the pulse of the market and no one is going to short these markets when stocks are so low," he said.
Stocks of copper in LME-monitored warehouses stood at around 110,000 -- around two days of world consumption -- have shrunk from nearly a million tonnes in April 2002. In nickel, the stock situation is even more severe, with available stocks measured in hours of consumption.
UBS analyst Robin Bhar said: "The producers, and even consumers are coming round to the idea that prices deserve to be at these levels."
"There is a growing realization among consumers that for the last twenty years they have been paying lower than average prices and perhaps for the next 20 years they will have to pay above average."
Miners and smelters were in a jubilant mood, and have reported record profits, but now consumers, who for much of the last year and part of this year, bemoaned soaring prices, were also feel more comfortable.
"The market is pretty optimistic. Even the consumers, which came as something of a surprise to us. The whole tone of the industry is rather bullish," an industry source said.
About the only sector of the market yet to join the positive chorus is speculative investors.
"The only divergence seems to be with the hedge funds. They are positioned to be negative. They take their stance from the global economic picture, and a lot of them are bearish because of what is happening in the U.S. housing market," Bhar said.
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