LONDON, Jan 17 - Aluminium fell on the London Metal Exchange on Wednesday, pulling other metals lower, as players monitored aluminium stocks for clues to the extent of a potential market squeeze.
"Everything looks a bit on the weak side...drifting without much sense of direction as the key underpinning the metals was aluminium," economist John Kemp at Sempra Metals said. Aluminium for delivery in three months was down at $2,665 a tonne by mid-session from Tuesday's $2,681 close.
"Sentiment is down...there have been large volumes of CTA (Commodity Trading Advisor) selling," an LME floor trader said.
Copper fell 1.8 percent to $5,610 versus $5,715.
The market had been supported by a large position in aluminium holding some 90 percent of available material on Friday, leaving the market short ahead of January's third Wednesday contract expiry.
"At the moment we are still waiting to see how this plays out...the interesting thing is to see where the nearby spreads are trading," Kemp said.
The LME's compliance team had observed the session and concluded that trading was orderly.
The potential squeeze had caused the nearby spreads or backwardation -- the premium of cash metal over the three-months price -- to hit $120 on Monday, up from $30 at the start of 2006 and the highest since 1990. [ID:nL16610192]
On Wednesday the backwardation eased to around $95/105.
Stocks in LME warehouses rose on Tuesday to 701,400 tonnes and on Wednesday they were up by 12,625 tonnes to 714,025.
Analysts had been expecting around 50,000 tonnes or more, so the very small inflow of stocks into LME warehouses suggested that positions had been rolled forward.
Workers at Guinea's CBG bauxite company halted output of its main mineral export in support of a general strike.
The country is the world's biggest shipper of the ore from which aluminium is extracted.[ID:nL17764951]
STOCKS WEIGH ON COPPER
Rising copper stocks dampened market sentiment.
They were up by 2,225 tonnes to 199,125, more than double the amount at the start of 2006.
"The technical tone in recent days has deteriorated," analyst Edward Meir at Man Financial said in a report.
"It seems the metal markets are in the throes of possibly another leg lower," Meir said, adding that copper might test the recent low of $5,430.
Zinc was at $3,590 versus $3,720, with stocks coming in higher at 100,325 tonnes, up by 5,725.
The metal has fallen by around 13 percent since the start of the year, pressured by index re-weighting and rising LME stocks.
"But we expect prices to move higher as the fundamentals remain very tight and the threat that China would export more metal has receded," Robin Bhar at UBS said in a note.
Nickel bucked the trend, adding $400 to $34,000/34,025.
The backwardation was around $2,000, up some three times since the beginning of the year, reflecting low stocks with only 4,428 tonnes available to the market.
Workers at Xstrata Plc's operations in Sudbury voted in favour of a strike mandate. [ID:nN16253044]
Lead lost $30 to $1,555 and tin was at $10,650/10,700 from $10,625 on Tuesday.
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