Copper under pressure, aluminium market nervous

LONDON, Jan 15 - Copper prices slipped on Monday as stocks rose further, while the aluminium market became more nervous as a squeeze tightened ahead of a key date later this week, analysts said.

Aluminium for three-month delivery closed slightly down at $2,700 a tonne on the London Metal Exchange from Friday's $2,705 close.

Copper prices lost $120 to $5,630 a tonne as stocks in LME warehouses rose 2,600 tonnes to 199,450 tonnes, more than twice their level at the start of 2006 and nearing 200,000.

"The market could get slightly rattled once we cross over that (200,000 tonne mark)," analyst Edward Meir at Man Financial said.

Copper has fallen by about 10 percent since January 2 and more than 30 percent since hitting a record high of $8,800 a tonne in May as investors sold on worries about economic slowdown in the United States, falling demand and rising stocks.

"The copper market is far less tight then it was a year ago. A return to market balance suggests that prices will remain in the range $5,500-$6,000 through most of (the first half of 2007)," Commerzbank said in a research note.       

Copper and aluminium are expected to extend their losses this year, but supply shortages mean nickel and zinc could revisit recent highs, a Reuters survey showed.[ID:nL15302191]

The squeeze in the aluminium market has roused suspicions that the money banked by selling copper has been ploughed into aluminium and other metals.

"(It) may be that speculators are leaving copper to trade in aluminium and some of the other metals," Robin Bhar, analyst at UBS said.

SQUEEZE

Aluminium traders were edgy as a squeeze tightened ahead of the third Wednesday of the month, by when investors must have decided how they want to close nearby futures positions.

One option for investors is to make or take delivery of metal, the other is to buy or sell an equal and opposite position at least two days before Wednesday January 17.

One player has built a dominant position and controls some 70 percent of LME stocks -- more than 690,000 tonnes.

Bhar at UBS said: "If this long large position will be rolled forward to the coming month, that might suggest that it might be some sort of operation to support prices."

Others analysts agree that the holder could be trying to bolster prices. [ID:nL10156555]

But that would be in the face of a large short position of around 920,000 tonnes for the March 21 prompt date.

"The more interesting question is who holds the other side of these positions and how they intend to settle them," said John Kemp, economist at Sempra Metals.

The squeeze had caused the backwardation -- the premium paid for cash metal over the three-months contract -- to hit $110, the highest since August 1997.

Backwardation allows investors to make money by lending metal to the market by selling for cash basis, buying the three-month contract at a lower price and pocketing the difference.

Zinc ended up $10 at $3,780 a tonne and nickel added $800 to $33,200.

The backwardation in nickel was at around $2,200 per tonne, more than three times its level at the beginning of the year.

"It is all signs of a strong physical market with stainless steel production still high, and stocks are low enough to cause more volatility on the upside," Bhar said.

Nickel stocks in LME warehouses dropped by 240 tonnes to 5,676, with only 4,200 available to the market.

Lead lost $10 to $1,615 and tin was untraded but last bid at $10,545 from $10,500 on Friday.