http://www.mineweb.com/mineweb/view/mineweb/en/page67?oid=90890&sn=Detail

That was very much against consensus.

The dragon's appetite remains as healthy as ever it seems, although there is no consensus as to how much copper is going to meet end-user demand and how much is disappearing into non-visible stocks.

But maybe we shouldn't be surprised at this continued buying strength. Maybe we've been guilty of believing another "old story".

That's how Danny Quah, professor at the London School of Economics, described the assumption that China's growth is ultimately dependent on the strength of demand for its products from the United States.

Quah's speech at the LME Seminar on Monday didn't get much media coverage but was something of a highlight. It's difficult to say much new about China's role in the world economy but that's exactly what he did.

Quah argued that China was indeed dependent on its export trade to the U.S. back in the 1980s and early 1990s but that it is now part of an emerging "trading cluster", covering most of East and Southeast Asia. In other words, if you're concerned about the health of China's export markets, look at how things are going in South Korea, Taiwan or the Philippines rather than the U.S.

Quah also synthesised the internal demand dynamics of China into a single, striking statement, when he said that over the last 30 years China has lifted 627 million people out of extreme poverty and converted them into global consumers.

THE MONEY TRAIN IS ROLLING
That in a nutshell is the long-term bull story that investors like about the industrial metals. Copper in particular is seen as a proxy investment in China's decades-long transformation from agrarian minnow to industrial powerhouse.

Its ability to maintain growth even when the rest of the world is mired in deep recession only fuels the bull story further, particularly since the shift of economic influence eastwards is intertwined with dollar weakness.

A cash-rich investment community has already powered metals prices higher and, everyone knows, is eager to buy more.

It's the reason there is no collective appetite to play the LME markets from the short side. It's the reason why analysts struggle to translate their assessment of fundamental dynamics into realistic price forecasts.

An expert in the lead market told me that based on his reading of supply and demand lead "should be" trading below $2,000 per tonne but that it could go to $3,000. "Just pick a big number," he said, shrugging his shoulders.

Investment demand is only going to increase and another analyst told me he was "scared" where prices could get to in Q1 2010, given the likely triple witching of 2009 investment performance tables, index re-weightings and end-year corporate earnings results which can only be better year-on-year.

The same analyst described as a "potential game-changer" ScotiaMocatta's recently-unveiled physical-backed copper fund. It may be small but if others go down the same route, the implications for a finely-balanced market such as copper could be huge.

HAS ANYONE SEEN MY V?
The only thing standing in the way of the next big bull market leg, it seems, is the conspicuous lack of demand recovery in the developed world.

London was full of copper fabricators last week and the mood is still universally grim. None are yet seeing any sign of physical recovery, or even of the much-anticipated restocking exercise that surely must follow such a vicious de-stocking cycle.

Indeed, parts of the industry are still in lock-down mode. One commentary about the state of affairs in Italy, a significant consumer of both copper and other metals, could have been from Q4 2008.

Some plants, I was told, are cutting back run rates again. Credit and credit insurance are still huge problems and smaller end-users are effectively being quarantined. Mutual uncertainty is still so high that there is almost no forward business in the physical market.

MIND THE GAP
Now, this sort of disconnect between the investment and the manufacturing worlds is nothing new in the LME metals. It is often the case that fund players react faster to macroeconomic turning points and that consumers, ironically, can be the last to notice.

But the current gap between the investment and the industrial user bases of the market is as wide as it's ever been and there is no way of reconciling the two view points right now.

No wonder that the mood in London over the last few days was cautious and that metal prices are stubbornly still holding their summer ranges.

So, what next? There are three possibilities.

The first is that prices retreat to close the current expectations gap. This is indeed what analysts have been expecting since the start of the third quarter. It hasn't happened yet and the collective reluctance to test the strength of the fund buying lurking below current price levels is as strong as ever.

The second is that the metals continue to mark time in broad sideways ranges through the end of this year. Then, it is possible that metals consumers will start to see the sort of pick-up in order flow that matches investors' global recovery script. In this scenario the gap between investors' and manufacturers' expectations will have naturally closed.

However, it may also be that the weight of money drives prices higher before then. That would widen the expectations gap and accentuate the existing dynamic tension in the market. In short, it would raise the stakes in this recovery game.

What would happen then if come Q1 2010 there's still no sign of physical recovery? Now, that's a scary thought...

* Andy Home is a Reuters columnist. The opinions expressed are his own. For more Metals Insider columns, top Reuters metals stories and third party content, please visit the free Base Metals Community website at (www.metalsinsider.com)