METALS INSIDER: LME chases the dragon

-- Andy Home is a Reuters columnist. The opinions expressed are
his own --

By Andy Home

LONDON, Feb 9 (Reuters) - U.S. unemployment is rising fast,
German manufacturing orders are sinking equally fast and the
cries of pain from the global automotive industry are becoming
ever louder.

But the LME markets last week shrugged off these signs of
what the Bank of England called "a severe and synchronized
downturn" in the global economy to focus on just one country,
China.

The dragon has returned from its New Year holidays full of
purpose and is cranking up the engines in preparation for the
Chinese government's multi-pronged stimulus package.

Chinese optimism has infected the London "street", forcing a
steady retreat by the mass of technical bear funds.

But can China alone offset the nuclear winter that grips
much of the rest of the global manufacturing sector ?

BEAR RETREAT

Short-covering was the name of the game across the LME
complex last week and the massed ranks of CTA technical funds
the target.

The "black box brethren" began scaling back their collective
short positioning a couple of weeks ago.

These players trade only off technical indicators,
particularly momentum signals, and the recent loss of downside
momentum in LME metals had encouraged shorter-term operators to
start taking their profits.

The process has been given the occasional helping hand by
proprietary desks probing for stop-loss levels but such
guerrilla warfare last week gave way to a broader retreat by the
technical funds.

Fund-watchers in London now estimate that the collective
short position on copper has been cut from almost 100 percent of
historic capacity at the end of December to somewhere closer to
50 percent.

Even in aluminium, where downside momentum has remained
stronger, technical funds have trimmed their exposure to around
80 percent of capacity.

The collective buy-backs have helped put a floor beneath
metal prices at least for the time being and predatory
contrarians can be expected to push further on the upside in the
knowledge that they have the bear army on the defensive.

THE CHINA STORY

Fund short-covering is the transmission system for higher
prices but the "street" needs a good story to justify the move.

China is that story.

There are tentative signs that the government's massive
stimulus package is starting to gain traction.

Purchasing managers indices improved for the second month
running in January. Although they are still below the boom-bust
threshold, China's industrial players seem to be recovering from
the cardiac arrest of November.

Lending figures suggest that the banking taps have been
turned fully on and micro measures, such as offering China's
rural millions discounted household appliances, are building
momentum.

More than anything else, though, London sentiment has been
rekindled by evidence that the government stockpile manager, the
State Reserve Bureau, has embarked on a massive restocking
campaign.

Reuters reported that the Bureau has now started buying
copper with a goal of tripling its current reserves of around
300,000 tonnes to around 1 million tonnes.

The buying "is being done very quietly and not in one big
go," according to a source familiar with the Bureau's current
strategy. "It is from multi-channel suppliers such as domestic
bonded warehouses and imports," the source added.

Copper purchases on such a scale, even if they do not amount
to actual consumption, would be enough to remove much of the
expected 2009 global surplus of metal and tuck it away from
sight in Chinese government warehouses.

For beleaguered copper bulls, the Bureau's appetite for the
red metal is a welcome diversion from the inconvenient fact of
rapidly-inflating stocks in LME warehouses.

SPRING IS ON HOLD

China may have a new spring in its step but those rising LME
inventories, not just of copper but also of aluminium, zinc and
nickel, are a reminder that the rest of the world is still prey
to powerful recessionary forces.

The financial reporting season has revealed the wreckage
caused by the global manufacturing meltdown of late 2008.

Finnish stainless steel giant Outokumpu, for example, said
on Tuesday its current order intake represented only half of its
production capacity. It accordingly announced another round of
production cuts and headcount reductions.

A similar announcement came Thursday from the world's
largest aluminium producer UC RUSAL. Its chief executive, Oleg
Deripaska, had warned in Davos that demand for the light metal
will fall by almost a quarter this year.

Even BHP Billiton, previously one of the staunchest bull
voices in the market, has joined the ranks of pessimists. Chief
executive Marius Kloppers told reporters that "the turning point
for any eventual recovery continues to be pushed out."

Governments are being forced to extend their bail-outs
beyond the stricken banking sector to core real-economy sectors
such as automotive.

All eyes this week will be on the giant U.S. stimulus
package, which seems set to complete its tortuous journey
through the U.S. legislature.

That will give another fillip to sentiment on the LME
"street" but the short-term prognosis is that China will have to
go it alone for a while yet.

The Chinese government has a sufficiently large war chest to
boost its own economy. But it cannot stimulate Western consumers
to buy a new car or a new house, particularly when so many are
losing their jobs.
While that remains the case, China's large export sector
will struggle to regain its previous robust good health and will
act as a drag on overall growth.

Those U.S. unemployment and German manufacturing order
figures, which were blithely disregarded last week, are just as
important as any tentative signs of recovery in Chinese
manufacturing.

The winter may be over in China but spring in the rest of
the world "continues to be pushed out."

LME three-month valuations on Friday and weekly changes:

Close Chg on Week Pct Chg
Aluminium $1,468 +$119 +8.8
Copper $3,540 +$385 +12.2
Lead $1,185 +$64.5 +5.8
Nickel $11,505 +$305 +2.7
Steel FE $305 +$25 +8.9
Steel Med $350 +$10 +2.9
Tin $11,200 +$400 +3.7
Zinc $1,185 +$88.5 +8.1