London, 2 April, 2011

In a second special edition of FastMarket Ltd's monthly newsletter, we analyse the performance of the LME's base metals contracts during the first quarter of this year. Base metals enjoyed varying fortunes during the first quarter of 2011, with benchmark metal copper down three percent despite setting a record high in February but tin was up a chunky 17 percent and also set lifetime highs.

Aside from zinc, which was also down nearly four percent, all the other main LME metals recorded first-quarter gains, with aluminium up more than six percent. Price performance, however, is often dictated by diverse influences, some of which are unrelated to metals.

Warehouse inventory movements are more closely linked to the underlying fundamentals of supply and demand; during the first quarter all the LME metals apart from nickel have witnessed stock increases. The most notable increase is the 35-percent jump in lead stocks but copper inventory has also climbed more than 16 percent.

This quarter has seen unusually high metal price volatility. After initial signs that a broad uptrend was in place, turbulence and uncertainty have swept through the financial markets in general, with the base metals sector no exception.

Concerns over sovereign debt in Europe - specifically troubled Greece, Ireland, Portugal and Spain - have ebbed and flowed this year, while the global economic recovery has stuttered at times. China, the world's key industrial metals consumer, has altered tack with a succession of monetary tightening moves - a process that is expected to continue.

Despite eurozone debt problems, the likelihood is that inflation fears will prompt the European Central Bank (ECB) to raise interest rates, possibly as early as next month. Although the US Federal Reserve is not expected to lift rates quite so soon, its financial stimulus package is being withdrawn.

Financial market trends have also been affected by unforeseen political and natural developments - the wave of unrest and changes in the Middle East and North Africa ( Mena) region and virtual civil war in Libya and the massive earthquake, subsequent tsunami and nuclear crisis in Japan.

This has resulted in reduced risk appetite for many assets in the commodity class. Some investment funds and short-term CTAs have exited positions, although the major macro and long-term funds have largely maintained their stance.

For the metals, the outlook entering what is usually the busiest quarter of the year for end-use is cloudier. Oil prices have risen due to the unrest in Mena - Libya has stopped exporting - and this will act as a drag on economic performance.

China has also been virtually absent as a buyer this year, with physical premiums collapsing amid ample availability of metal in bonded warehouses there - said to be between 500,000 and 700,000 tonnes. LME warehouse stocks have climbed from 377,750 tonnes to a 439,850 tonnes, just 50 tonnes below the highest since July 2010.

Aluminium has put in a more solid performance, climbing to a 30-month high of $2,656 earlier this week from $2,475, with fundamental stimulus stemming from the Mena unrest - the region accounts for some 10 percent of global smelting capacity.

Inventories have increased, however, to 4.624 million tonnes in mid-February, the highest for 13 months, from 4.277 million tonnes at the start of the year. At 4.595 million tonnes now, they are not far off January 2010's all-time high of 4.64 million tonnes, although 70 percent thereof is tied up in term financing deals.

Sporadic supply-side issues have helped lead. It hit its highest since April 2008 at $2,739.75 recently, with technical tightness and a backwardation on the LME, despite stocks climbing to 297,500 tonnes last month, the highest since March 1995, from 208,275 tonnes.

Sister metal zinc has fallen to around $2,340 from $2,430, with inventories rising to 736,675 tonnes, just 425 tonnes below recent six-and-a-half-year highs, from 701,425 tonnes.

Tin's price has been boosted by worries over Asian production and a shortage of quality metal. The market ranged up to an all-time high of $32,799 in mid-February from $26,950.

Inventories have climbed 12 percent, however, to 18,285 tonnes - not far off last month's seven-and-a-half-month highs of 18,775 tonnes - from 16,275 tonnes.

Nickel rose as high as $29,425 last month, its highest since April 2008, while inventories have been whittled down to 123,696 tonnes from relatively high levels of 135,672 tonnes.

Below are tables showing price performance, basis three months, and inventory movements in LME-registered warehouses in the Jan/Mar period.

Ends --