LME copper higher on falling inventories

LONDON, Feb 6 - Copper traded higher on Tuesday as stocks in London Metal Exchange warehouses fell, and analysts said prices might keep rising if the trend persisted.

"If that were to continue...more downs than ups in visible stocks, then there would be one or two shorts around that might give us a base in these markets as they unwind their positions," chief investment strategist Sean Corrigan at Diapason Commodities Management said.

Copper for delivery in three months ended the day up $135 at $5,475 per tonne.

In New York, copper for March delivery advanced 8.00 cents, or 3.3 percent, to close at $2.4965 a lb on the New York Mercantile Exchange's COMEX division, a shade below the upper end of its $2.4440-$2.50 trading band.

Copper stocks in LME-monitored warehouses fell for the second consecutive day to 212,575 tonnes, but stocks have doubled in the past 12 months and are over eight times greater than their July 2005 low.

"We need to see some sustained drops of inventories," Corrigan said, adding it would signal a beginning of the Chinese re-stocking after the world's largest copper consumer ran down its inventories in 2006.

Jonathan Blake, manager of the $409.4 million Baring Global Resources Fund said recent weakness in commodity prices was short-term and demand would pick up in the second quarter.

"The base metals market is expected to perform strongly this year supported by the continued strong demand from China and the rest of the world," Blake said in a press release. Copper and zinc plunged on Friday after a report in The Wall Street Journal that $1.5 billion hedge fund Red Kite had lost 20 percent in the first days of January and wanted to extend the redemption notice period for investors to 45 days from 15. [ID:nN02255203]

"It is a bit of a distorted market with all these rumours of yet another hedge fund overstretching itself -- the question is are we brave enough to take advantage of this," Corrigan said.

Copper has dropped by some 15 percent and zinc has fallen by over 26 percent so far this year.

Zinc was up 3.9 percent at $3,220 versus $3,100, compared with its record high of $4,580 set in November.

"The record high prices are beginning to bring about a supply response from a combination of the reactivation of previously idled capacity and eventually via greenfield projects," Natexis Commodities Markets said in a report.

The bank expected weaker prices in 2008 with a forecast of an average price of $2,800 per tonne.

ALUMINIUM, NICKEL

LME aluminium fell $9 to $2,703/2,705 ahead of this week's options declaration for February.

Ahead of the option declaration on Wednesday, when holders can exercise their right to buy or sell the underlying metals future at a specified price at a fixed time, the market was likely to try and push aluminium prices higher, dealers said.

The cash to three months spread was at a wide $117/119 backwardation up from around $30 at the beginning of the year.

Stocks came in at 751,000 tonnes, up by 2,125.

Nickel was up $105 at $35,800, with buying again spurred by a fall in stocks, analysts at Barclays Capital said.

LME stocks fell to 2,982 tonnes, their lowest since 1991 and the premium for cash metal was $3,450/3,550.

Lead closed at $1,571 versus $1,603 and tin was at $11,925 against its last quote on Monday at $11,898/11,900.