Humeyra Pamuk
RTGAM



LONDON - Nickel hit its highest in over 21 months on Wednesday and is on track to outperform the rest of the metals complex in the first quarter, as supply shortages and robust demand from stainless steelmakers buoyed prices.

Aluminum and zinc also rose to multi-week highs, while copper drifted lower after hitting a 19-month high in the previous session, but traders said fund activity could drive it higher later in the day to close the quarter comfortably in positive territory.

Copper was down at $7,825 (U.S.) a tonne by 0923 GMT versus a last bid of $7,849 a tonne. The metal, used in construction and wiring, is set for a quarterly gain of around 6 per cent.

The price of nickel, a key ingredient of stainless steelmaking, rose to $24,750 a tonne, its highest since June 2008 and was at $24,682 a tonne, versus Tuesday's $24,300.

Analysts believe there is further room on the upside.

"We think (nickel) prices will peak in Q2," said David Wilson, analyst at Societe Generale. "We're seeing stainless steel production accelerating, stock levels are beginning to edge down and, more importantly, (the) scrap market is very, very tight."

Stainless steel mills account for about two-thirds of global nickel demand.

A series of strikes, project delays and production problems are expected to send the nickel market into deficit in 2010, the first time in four years.

LME nickel inventories hit a record high above 166,000 tonnes in early February. But since then, they have dropped around 6 per cent to their lowest since late-2009.

"The outflows from the LME in terms of types of nickel has mainly been briquettes...which is preferred because it's smaller and it's easier to fit into feed mechanisms...which to me indicates that it's consumption driven phenomenon," said Mr. Wilson.

FLOWS KEY

Investment flows will continue to be a key driver of the industrial metals market in the second quarter, analysts said, particularly for copper, where the market needs fresh flows to keep the rally going.

"This market has been purely about speculative money flows," an LME trader said. "I still buy the long-term copper story but buying seems to have faded over the past couple of weeks. The Chinese would not buy at these levels," he said.

Moves in the currency markets have been a major driver of commodities. On Wednesday, the euro's strength versus the dollar helped improve the sentiment, though the single currency still looks vulnerable because of Greece's fiscal problems.

"It has been difficult for copper to maintain the momentum and I guess people are begining to look at other metals," Mr. Wilson said, adding lead was also offering a bright outlook.

Battery material lead was bid at $2,160 from $2,135, while aluminum rose to $2,315.25 a tonne, versus $2,294.

Investors are awaiting the U.S. March non-farm payroll data, scheduled to be released on Friday, for more insight into the health of the economy. Later on Wednesday, they will watch out for U.S. Chicago PMI data.

Zinc hit a fresh three-week high at $2,395.50 a tonne and was last at $2,390 a tonne from Tuesday's $2,380. Tin touched $18,465 a tonne, its highest since September 2008, and was last at $18,450 a tonne versus $18,370.