London, 5 September 2011: Reuters

Global manufacturing growth turned decidedly sluggish in August in what looks to be a synchronised slowing of activity. Interpretations of this collective slowdown range from the benign (China), to the ambivalent (the U.S.) to the downright alarming (significant parts of the euro zone, including this time around Germany).

One way or the other, though, it is not good news for base metals, leveraged as they are to the global industrial production cycle. That's not to say that the core LME-traded base metals can't enjoy a seasonal lift as Northern Hemisphere summer, characterised by reduced semi-fabricator activity, gives way to autumn, a time of year that should see postholiday demand reinforced by restocking.

This is particularly true of those, such as tin and copper, where underlying supply-demand shortfalls have up until now been masked by price-induced de-stocking. The lightning rod for some seasonal lift should be LME stocks movements, both in terms of what happened last month and what cancelled tonnage is telling us to expect in the coming weeks.

However, as the table below shows, stock movements in August largely broke with seasonal patterns with the exceptions of nickel and tin. And current cancelled tonnage levels signal a very divergent set of individual dynamics.

COPPER

Take copper as an example. Copper stocks on the LME actually fell in August. This was only the second time this has happened since 2003. Similarly, global exchange stocks also fell last month to the tune of 13,854 tonnes, largely thanks to a 15,352-tonne decline in Shanghai tax-paid inventory.

There are two ways of looking at this counter-seasonal movement. It could be that the usual summer stocks cycle has lost intensity as high prices override seasonality in terms of fabricator stock levels.

If you're bullish, though, it could be "proof" that underlying deficit is now starting to manifest itself and that China has de-stocked as much as it can. The only problem with the bullish interpretation is that there's no evidence of any strong demand for LME metal in the form of cancellation activity. Cancelled tonnage across the system is just 5,325 tonnes, equivalent to 1.1 percent of total registered tonnage. That's the lowest ratio of any of the major LME metals. Moreover, most of that cancelled tonnage, 3,175 tonnes, is located in New Orleans. Cancelled tonnage in South Korea and Singapore, which should be the locations most sensitive to any shift in demand dynamics from China, totals a meagre 725 tonnes.

In other words, if you're looking to Dr. Copper for some enlightenment about the health of global manufacturing, don't bother. It doesn't seem he's back from his vacations yet.

TIN

Bulls would do better to check out their other favourite base metal. LME tin stocks rose by a net 1,830 tonnes last month, which was in keeping with historical patterns. However, cancellation activity was unusually robust and cancelled tonnage in the system now totals 2,180 tonnes, representing 9.7 percent of total registered tonnage. It's the highest ratio of any of the LME-traded base metals.

It also fits in with anecdotal reports of rising physical premiums and heightened Chinese buying interest. Remember that it was de-stocking by Chinese producers in the early part of the year that caused tin's bull narrative to unravel so spectacularly.

Obviously, tin stocks are still high in outright terms and nearby spreads suggest no imminent tightness. The benchmark cash-to-three-months period was valued last night at a comfortable $78 per tonne contango, but then spreads in one of the exchange's least liquid contracts can shift very fast indeed, as the unwary have found out to their cost in the past.

NICKEL

Nickel is another metal that merits some seasonal scrutiny. The stainless steel input has its own stocks cycle with LME stocks tending to fall in the first part of this year and rise in the second half. Sure enough, LME inventory rose by a net 1,404 tonnes in August, the first monthly rise this year and very much in keeping with historical patterns. That reflected the return, bang on time, of heavy-volume inflow of Russian uncut cathode at Rotterdam, 7,332 tonnes of it.

An offset, though, comes from heavy cancellation activity, particularly in the last days of the month, when close to 7,000 tonnes moved into the "departure lounge". Interestingly, much of this action took place in key Asian locations. The ratio of cancelled to registered tonnage across the system as a whole is 7.5 percent but it is much higher in Singapore (26.8 percent), Busan (45.0 percent) and Gwangyang (57.4 percent).

It is hard to avoid the conclusion that metal is being prepared for departure to China, particularly given price anomalies in the Chinese market last month, when for a time nickel pig iron prices were above those of refined metal.

SHIFTING SURPLUS

There are few insights into post-summer demand to be gleaned from LME stock movements in the other metals because all three are in strong surplus and shifting inventory is therefore largely shifting surplus. Aluminium stocks, for example, surged in August as old surplus moved into LME sheds in Vlissingen.

Cancelled aluminium tonnage looks high but this is largely a reflection of the stocks-financing roundabout at Detroit. Strip Detroit out of the equation and the ratio of cancelled tonnage in the system drops sharply to just 2.4 percent.

More interesting is the steady decline in Shanghai-registered stocks, which as of today are at 117,799 tonnes, down by 323,370 tonnes on the start of the year and the lowest they've been since January 2008. That the Chinese primary metal market is in deficit is not in doubt. Whether it will re-balance itself without imports is the key question hanging over the aluminium market right now.

Zinc stocks movements also look bullish with a highly unseasonal 33,475-tonne net decline in August. But much of this took place in New Orleans and resulted from abnormally high cancellations in July which suggested more "warehouse wars" than end-user demand.

Graphic on LME Stocks vs Prices

August itself saw zinc cancellations pretty much dry up. Throw historically high Shanghai stocks into the mix and there's nothing to suggest that LME stock movements are anything more than a shuffling of surplus between warehouse owners.

Lead offers some greater encouragement for metals bulls with cancellation activity running strong in August. Worth noting in particular is the wholesale cancellation of stocks at both Baltimore and Chicago in recent days.

Is this a sign of seasonal demand from battery makers ahead of the winter peak in battery replacement or merely a shadow-dance between longs and shorts as the market gets squeezed (yet again)?

The jury is out. More clues when the September prompt date arrives.The September-October spread is currently valued at $18 per tonne backwardation and the squeeze is going to overshadow "real" demand in terms of impact on LME inventory.

Ends --

By Andy Home, Reuters market analyst – for Commodities Now.

The views expressed here are his own.