London, 5 February 2011Global manufacturing activity is booming...

London, 5 February 2011

Global manufacturing activity is booming again, supply disruptions are proliferating and metal is flying out the door of LME warehouses. That's why prices are on a surge, right? Well, most of that statement is true. JP Morgan's Global Manufacturing PMI did expand at its fastest pace in nine months in January with even the "old industrialised" world playing catch-up on emerging countries such as China and India.

In Australia, Cyclone Yasi has forced the shutdown of the 300,000-tonne per year Townsville copper refinery, the 30,000-tonne per year Yabulu nickel refinery and the Century zinc mine. And, yes, metals prices are on a surge with LME three month copper this morning touching that "magic" $10,000 per tonne level. [View copper charts statistics here].

Stocks of metal in LME warehouse, however, are not flying out the shed door. Only one base metal ? nickel ? saw any sort of stocks fall at all last month. The others saw accumulations ranging from a light sprinkling of copper and zinc to an avalanche of lead and aluminium.

True, seasonal factors are important at this time of year and, true also, LME stocks movements are no longer the market driver they once were. The waves of hot investment money flowing into the LME complex right now are swamping traditional stocks-price relationships.

But changes in LME stocks are a core part of each metal's narrative, offering an up-to-the-minute glimpse of what is happening in the real world "out there". And it is that narrative which determines where all that investment money is directed, which in turn creates the technical waves on which the hot money surfs. So how's the story for each metal reading so far?

NICKELAgainst the general base metals trend, LME nickel stocks fell by 2,448 tonnes, or 1.8 percent, over the month of January. There were two other bullish developments. Firstly, the ratio of cancelled tonnage in the LME system, namely metal that is earmarked for physical drawdown, ended the month at 4.2 percent. That's not outlandishly high but it was the second highest of the LME base metals after tin.

Secondly, the headline figure understates recent demand for the premium-shape nickel in the LME system. There are only 276 tonnes of non-cancelled briquettes and 18 tonnes of cathode left.

Everything else is commodity-grade full-plate, the metal of last choice for most nickel users. It will only be tapped when other forms of nickel are exhausted, which on current trends will be soon.

TINTin, last year's star turn among the LME pack, did the same again in January, notching up a price rise of 11.9 per cent (on a close to close three-months basis, as are all the price comparisons in this item).

That marked a major divergence with LME stocks developments last month. They rose by 8.9 percent, the second steepest percentage increase after lead, and ended the month at a seven-month high of 17,835 tonnes.

With no evidence of any supply-side surge in reaction to record-high prices and a rock-hard analysts consensus that tin will record a global supply-demand deficit this year, rising stocks must be interpreted as a sign of consumer destocking. And rising prices a sign of investment exuberance.

Bulls will hope that a late-January burst of cancellation activity heralds a return of physical buyers. At the end of the month there were 1,565 tonnes of metal sitting in the cancelled metal "departure lounge". That was equivalent to 8.8 percent of total registered tonnage, the highest ratio of any of the LME base metals.

COPPERCopper prices and stocks also moved in the same direction in January. The red metal notched up monthly gains of 10.5 percent, making it the second-best performer after tin, also extending last year's rankings.

LME stocks rose by 16,250 tonnes, or 4.3 percent, last month. Those registered with the COMEX and Shanghai also rose and combined exchange inventory of 592,334 tonnes at the end of January was the highest it's been since September.

Bulls can take heart from the fact that stock builds, particularly on the LME, are by no means uncommon at this time of year. There is a marked seasonality to copper usage in the Northern Hemisphere and the average January LME stocks rise over the 2003-2010 period was 12,800 tonnes.

Moreover, global exchange stocks are still very low by just about any historical yardstick and represent less than two weeks' consumption. One bearish development, though, was the decline in cancelled tonnage in the LME system over the second part of January. It ended the month at 14,550 tonnes, representing 3.5 percent of total registered tonnage. It's the lowest the ratio has been since May of last year.

Such a minor detail is unlikely to derail the "red machine" but copper's many supporters will be looking for stocks to start conforming to the bull script, particularly after the end of the Chinese New Year holidays.

ALUMINIUM AND LEAD

These two metals saw the heaviest inflows of metal last month. A total 342,000 tonnes of aluminium were delivered into the LME system and the headline stocks figure rose by a net 250,575 tonnes last month. That negated much of last year's 350,000-tonne decline.

None of which stopped aluminium rising by 2 percent in price, It's not as if these arrivals came as much of a surprise. Ever since the Great Contraction of 2008-2009 it has been common knowledge that the LME aluminium mountain had a mirror-image sitting off market. Even last year much of the visible stocks flow was no more than movement between visible and non-visible storage. Moreover, the market is this year more interested in what is happening in China and there both production and Shanghai stocks have been falling. Lead, however, serves as a warning of what happens if you try and squeeze too hard a market with high off-market stocks.

The resulting avalanche of deliveries into the LME system propelled lead stocks up by 74,150 tonnes to a 15-year high of 282,700 tonnes. And metal is still being delivered daily into the system last week.

The deluge of metal has dampened, for now at least, some of the bull hype that surrounded the heavy metal, which is a good sign that January's events were not in the consensus script. As a result lead prices fell by 1.6 percent last month, making it the laggard of the LME pack.

ZINCZinc didn't fare much better than lead last month, prices slipping by 1.1 percent, even though LME stocks registered "only" a 1.3 percent increase of 8,850 tonnes last month. The headline figure of 710,275 tonnes at the end of the month, though, was still close to 6-year highs and it's not as if much is leaving the system right now. A cancelled ratio of 0.3 percent promises no more than the daily trickle of departures that characterised activity in January.

LME zinc's muted stock patterns are strongly suggestive that there is much more "out there". It will probably stay "out there", unless someone tries to squeeze it like lead, in which case the heavy metal has just shown that things can change very quickly.

Ends --