NICKEL LEADS BASE METAL PRICES HIGHER

Supply concerns and a weaker dollar breathed second life into the base metals rally over the past week, although sources say prices are unlikely to maintain current levels on fundamentals alone. Nickel was the standout during the week as continued tightness in the market drove up prices not seen since June, 2008.

Base metals ended Friday in positive territory, with nickel for 3 month delivery on the LME gaining 9.7% from a week earlier, three-month aluminum rose 6.9%, and copper was up 5.7% and tin and zinc each gained 4.9%. Lead contracts lagged the complex posting a meager 1.3% weekly gain.

The metals sector also saw some positive news from the Organization for Economic Cooperation and Development (OECD), which released its composite leading indicators for January, noting improvement in economic activity in the G7 countries and recovery in India and Brazil. "Economic activity is projected to continue to expand in China and Russia" the OECD said.

Some analysts are seeing more upside in their long term outlook for metals. "People are starting to discount the double-dip recession and the OECD came out with an improved report on their leading indicators for the entire world, so the biggest problem right now is the valuations" said Justin Lennon, analyst at Mitsui Bussan Commodities in New York. And who likes to pay full value? Who likes to pay retain prices in a recession?

STAINLESS REVIVAL TRICKLES DOWN TO RAW MATERIALS

The unexpected revival of stainless steel production in the first quarter is having a dramatic effect on the raw material supply chain, with nickel moving into a deficit and ferrochrome and molybdenum prices up more than 30% since the beginning of the year. The recovery of the stainless sector has been quite surprising especially considering that December 2009 was a poor month as mills cut production in an attempt to be lean and mean coming in to 2010.

A lot of the specialty alloys are doing well, but the real catalyst to the increase in physical premiums has been this about face by stainless at the beginning of the year, a US based nickel trader told AMM. "These guys were completely spooked last year and refused to carry any raw material inventories into 2010. When there order books improved, they had to buy spot nickel and many of the mills faced the stark realization that it just wasn't available anymore at least not at a cheap price".

In addition to improved demand, North American nickel supply has been dramatically impacted by the 8 month strike at Vale Inco Ltd's operations in Canada, which has kept about 10% of global supply off the market. All of this adds up to a global nickel deficit in 2010. It is a similar story in the ferrochrome market where prices are up 43% since the beginning of the year.

IN the molybdenum market, spot ferromolybdenum prices have increased to around $20/lb from $15/lb at the beginning of the year. While molybdic oxide prices have risen to $18/lb from $11.50.lb. Risks to raw material prices remain firmly to the upside for the next several months. Expectations of rising raw material prices are feeding the higher steel prices, causing a restocking cycle by buyers of stainless and carbon steel, this could stimulate further strong rises for raw materials and steel prices in the coming months.

Copper Prices Leap As Mart Eyes Quake Impact

Copper prices surged Monday as traders tried to gauge the extent of disruption to output from Saturday's earthquake in Chile, the world's top copper producer. Three month copper erased last week's losses, rocketing 3.7% higher to end second ring trade on the LME at $7.360 per tonne on Monday vs. Friday's close at $7,096 per tonne. In New York May delivery copper settled at $3.35/lb up 2% from $3.284/lb on Friday, after earlier hitting highs of $3.487/lb.

It was your typical reaction to a catastrophic event. The 8.8 magnitude earthquake, which saw miners across central Chile and neighboring provinces temporarily shut operations and evacuate workers, closed some 1 million tonnes of copper production Saturday. Chile's largest copper mines are located in the northern regions and were unaffected by the quake. But while the quake's impact on Chilean mine output could be limited other market participants warned it might have far reaching consequences for the global copper concentrates market.

One third of global concentrate production would be out of Chile, and while not all of that is going to be disrupted there is potential that smelters in Japan, China and India that have term contracts may be notified that they may receive lower tonnages in the weeks or months to come. Production could also be impacted further due to problems with Chile's power supply. Over the coming days, power may have to be rationed to provide it to the rest of the country. There could also be delayed consequences for more remote copper mines that draw their electricity from diesel operated power plants, which might face fuel shortages because many of the country's oil refineries have been shuttered by the quake