LONDON — Copper prices rallied to 10-1/2 month highs on Thursday as investors bought industrial metals on rising optimism about growth, but analysts said gains were built on the quicksand of sentiment and could prove short-lived.
Battery material lead rose nearly 5 per cent to $1,940 a tonne and nickel – key for stainless steel – surged more than 7 per cent to $21,090, the highest since August 2008, while zinc hit $1,948, the highest since July 2008.
Benchmark copper on the London Metal Exchange hit $6,422 a tonne, the highest since early October last year and more than double the levels seen in early April when markets started to think the worst of the recession was over.
The metal used in power and construction traded at $6,415 a tonne at 1036 GMT from $6,190 at the close on Wednesday.
The latest trigger was the U.S. Federal Reserve, which said the world's largest economy was showing signs of stabilization after the deepest financial crisis in decades.
“The Fed said the economy had stopped contracting, it didn't say the U.S. was growing ... It's fantastic to see, but metals are flying on sentiment, which could turn very quickly,” said Andrey Kryuchenkov, analyst at VTB Capital.
Mr. Kryuchenkov added that dollar weakness, which makes metals priced in dollars cheaper for holders of other currencies, had also been reinforced by the U.S. central bank, which said interest rates would stay low for a while.
News that Germany and France returned to economic growth in the second quarter was welcomed, but unless the market sees signs of real demand, a major correction is due. Analysts say most of the demand in recent months has been for restocking.
“Everything has moved too quickly, we're going to see a crash landing,” a London-based trader said. “The skepticism is very palpable.
Also on the radar is the Baltic Exchange's main sea freight index, which tracks rates to ship dry commodities. The index has fallen nearly 40 per cent since hitting 4,291 on June 3, its highest in more than 8 months.
“Declining bulk freight rates are worrying some clients and commentators, as the recent disconnection between base metals prices and the Baltic Dry Freight Index is quite unusual,” UBS said in a note.
“Prices have moved sharply higher this year, in some cases well ahead of any fundamental justification, and this leaves the complex vulnerable to deterioration in risk appetite.”
One metal for which analysts say price rises cannot be justified is aluminum, which according to a Reuters survey is expected to see surpluses for some years.
The metal used in packaging and transport is up about 50 per cent since April, partly because of expectations of higher demand from the auto sector, on the brink of collapse a few months ago.
Another reason is a nearby supply shortage created by financing deals, which are said to have tied up about 70 per cent of the record 4.56 million tonnes of stocks in LME warehouses until next May.
Aluminum was at $2,060 a tonne from $1,985, zinc at $1,940 from $1,851, lead at $1,920 from $1,850, tin at $15,200 from Wednesday's last bid at $14,800.
Nickel was at $21,050 a tonne from a last bid of $19,650 a tonne on Wednesday. The three-month LME nickel contract is a favourite instrument of funds which use numerical models to generate buy and sell signals.
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