METALS INSIDER: $1 trillion? What else, Mr Geithner?

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

By Andy Home

LONDON, Feb 16 (Reuters) - China had dominated the metals
market agenda the previous week but last week all eyes were on
the world's largest economy, the United States.

The $787 billion fiscal stimulus plan inched its way through
the legislative process and will be ready for presidential
sign-off this week but it has already been eclipsed by concern
as to what the U.S. government is going to do to recapitalise
its banks.

Timothy Geithner, newly-appointed Treasury Secretary, tried
to explain on Tuesday but stock markets started sinking almost
as soon as he began and they continued falling after he was
finished.

The collective thumbs-down from markets the world over, with
the notable exception of "safe-haven" gold, spread renewed
despondency around the LME "street", nipping in the bud any
further upside sorties against low-lying bear positions.

BLACK HOLE

Expectations were running so high ahead of Geithner's
speech, it's difficult to imagine how many rabbits he would have
had to pull out of the hat to meet them.

In the event he produced no magic, merely a broad sketch of
a public-private partnership to buy up to $1 trillion of toxic
assets from the banking system.

The lack of concrete detail infuriated the markets and the
collective disappointment was manifest in the Dow Jones
industrial average slumping by 4.6 percent, its biggest one-day
decline since Dec.1. Not entirely surprisingly bank stocks were
particularly hard hit.

The markets' reaction may seem churlish but it is a sign of
the general consensus that the crisis in the banking system
still lies at the root of the current global downturn and that
until it is solved, things are not going to get a whole lot
better.

Indeed, rising unemployment, more home foreclosures and
newly-emergent cracks in the corporate sector risk generating a
second-round negative feedback loop with already foundering
financial institutions.

Dominique Strauss-Kahn, head of the International Monetary
Fund, warned that unless governments got rid of bad assets on
banks' balance sheets, stimulus plans, however mighty, "will
just go into a black hole".

Already in a black hole is much of the developed world's
manufacturing activity and worse may be to come, according to
Strauss-Kahn, who said last week that "the effect on the real
economy, for the most part, is still to come."

Not good news for the metal markets, where surplus metal
continues to fly through the LME warehouse door, in response to
disappearing order flow.

The German steel industry estimates that new orders
plummeted 47 percent in the final quarter of 2008, part of a
broader contraction which saw economic activity in the euro
zone's largest economy fall at the fastest pace since
reunification.

In Italy Claudio De Cani, director of local non-ferrous
metals association Assomet, told Reuters he thinks output of
copper semi-finished products could fall by 30 percent over the
first half of this year with aluminium product output sliding by
20-25 percent.

And this might get worse?

NO EASTERN PROMISE

Western gloom re-enveloped the eastern promise of the
previous week with the copper market reacting badly to the early
snapshot of China's copper imports in January.

The "street" had been looking for a repeat of December's all
time highs. It didn't get anything close, even though it's clear
that China Copper Inc. remains in restocking mode with the
government stockpile manager, the State Reserve Bureau, now
getting in on the act.

But China, the newly despondent mood in the LME market has
it, will not be able to rescue the rest of the world, while the
banking system remains in a state of almost continuous crisis.

If anything, China's collective optimism about its own
massive stimulus package may even be a negative for those
markets, where the country has existing surplus capacity.

Steel production is being cranked higher, judging by a
returning appetite for iron ore imports, while there are
worrying reports of new aluminium capacity being fired up.
Just what the rest of the world needs!

Aluminium inventory in LME warehouses continues to balloon
and is fast approaching the 3-million tonne mark. Non-Chinese
producers are taking ever-deeper cuts to their own production
simply to stay afloat.

The financial carnage in the sector gets steadily worse.

U.S. giant Alcoa has just had its credit ratings cut to one
notch above "junk" grade, while fellow producer Aleris announced
it is seeking Chapter 11 bankruptcy protection for its North
American business.

Rio Tinto, which is sinking beneath the debt mountain it
took on in buying Canadian aluminium producer Alcan, has been
forced to turn to Chinalco, the Chinese state metals giant, for
a cash infusion in return for stakes in its crown jewel assets.

MINOR DIVERGENCE

Not everything is doom and gloom in the LME complex,
however, Tin, the minnow of the pack, has not seen stocks
rebuild to anything that might be called a comfort zone and
seems to be once again prey to a mini-squeeze.

The benchmark cash-to-three-month period ended last week
valued at $279.50 per tonne backwardation, compared with $70 the
previous week. Outright three-month prices actually rose
week-on-week, in stark contrast to the major metals in the
complex.
However, there are limits to price divergence from such
"minors", while broader market sentiment remains so poor.

Mr Geithner, it seems will need to have a second shot at
explaining just how toxicity is going to be drained from the
cancer-ridden banking system. He probably shouldn't wait too
long either. Those black holes are multiplying.

This column returns in early March.

LME three-month valuations on Friday and weekly changes:

Close Chg on Week Pct Chg
Aluminium $1,377 -$91 -6.2
Copper $3,450 -$110 -3.1
Lead $1,170 -$15 -1.3
Nickel $10,325 -$1180 -10.3
Steel FE $335 +$30 +9.8
Steel Med $305 -$45 -12.9
Tin $11,370 +$170 +1.5
Zinc $1,153 -$32 -2.7