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By Chanyaporn Chanjaroen

Jan. 2 (Bloomberg) -- Nickel gained the most since at least 1987 in London on speculation index funds will buy more industrial metals this month to reflect annual re-weightings in their benchmarks. Zinc and copper also advanced.

Nickel gained 36 percent in four trading sessions. Buying by funds tracking the Dow Jones-AIG Commodity Index would likely equal 7.7 percent of open interest, according to Robin Bhar, an analyst at Calyon in London. That’s equal to about 6,000 lots, or 36,000 metric tons, based on current data.

“That would be four very busy days for nickel,” said Randy North, a trader at RBC Capital Markets in London. Traders and investors have been buying nickel and zinc since late December on anticipation of the index re-weightings, he said.

Nickel for delivery in three months added $1,400, or 12 percent, to $13,100 a ton as of 4:23 p.m. on the London Metal Exchange. Earlier it jumped almost 16 percent, the biggest one- day gain since January 1987. The metal declined 56 percent last year. Zinc advanced $82, or 6.8 percent, to $1,290 a ton.

Commodity investments probably fell to about $145 billion at the end of last month, from $210 billion at the end of the third quarter, Barclays Capital said Dec. 18. Standard & Poor’s said Nov. 3 it would increase the weightings of lead, nickel, zinc and New York-traded copper in its S&P GSCI index. Dow Jones & Co. announced new weightings in August.

Manufacturing in China, the world’s largest user of all industrial metals, contracted for a fifth month in December as recessions in the U.S., Europe and Japan sapped demand for exports from the Asian nation. The CLSA China Purchasing Managers’ Index stood at a seasonally adjusted 41.2 compared with a record low of 40.9 last month, CLSA Asia-Pacific Markets said today. A reading below 50 means a contraction.

Free Fall

In the U.S., the biggest copper and aluminum consumer after China, the Institute or Supply Management’s factory index fell to 32.4, below forecasts and the lowest since 1980, the Tempe, Arizona-based private group said today.

“Macroeconomically, we’re in a freefall,” said John Brynjolfsson, the managing director and chief investment officer at hedge fund Armored Wolf LLC in Aliso Viejo, California. “That’s a complete destruction in industrial production and demand, and this is likely to keep pressure on the commodity sector in general.”

Nickel inventories rose 432 tons, or 0.6 percent, to 78,822 tons, the highest since 1995. They have risen almost 12 times in the past two years. Those of aluminum increased 0.4 percent to 2.34 million tons, a 14-year peak.

Aluminum rose $40.50, or 2.6 percent, to $1,580.50 a ton.

Copper gained $180, or 5.9 percent, to $3,250 a ton. The contract for March delivery was up 4.9 percent at $1.479 a pound on the Comex division of the New York Mercantile Exchange.

Buying to reflect the re-weighting of the DJ-AIG index would likely add demand equal to 7.9 percent of copper’s open interest, Bhar estimated.

Among other LME-traded metals, lead added $26, or 2.6 percent, to $1,025 a ton and tin was $850, or 7.9 percent, higher at $11,550.

To contact the reporter on this story: Chanyaporn Chanjaroen in London at cchanjaroen@bloomberg.net

Last Updated: January 2, 2009 12:01 EST