LONDON (Commodity Online): Prices rallied yesterday with Nickel closing up 2% on the day and the strength has continued through this morning’s trade. These moves show just how much macro-fear is built into prices and the upside impact even the smallest reprieve in concerns has. SHFE Copper (-1.3Kt), Aluminium (-1.3Kt) and Zinc (-142t) inventories all declined this week, while Lead rose 435t.

The decline in copper stocks against a backdrop of rising refined metal imports and strong domestic production paints a robust picture of domestic demand in our view, which is supported by the growth in semis production which picked up pace in August (up 19% y/y).

Also interestingly the import arbitrage for copper recently re-opened which illustrates the relative strength of the Chinese market. The decline in aluminium stocks meanwhile reflects the tightness in spot supply given power-related smelter production cuts and strength in consumption. This tightness is illustrated by SHFE time spreads which have been moving further into backwardation recently.

While the recent movements in zinc suggest to us that the market has moved to become more balanced following the earlier surplus. The ongoing strike at Freeport McMoRan’s 510Ktpy Grasberg Copper mine is reported to have resulted in delays to ore shipments totalling 133Kt. Workers at the port joined the strike by mine workers stranding six vessels which had been expecting to deliver ore to smelters (Reuters).

The International Nickel Study Group (INSG) released data for July which showed that the refined market was in a 2Kt surplus in July, bringing the year-to-date balance to an 8Kt deficit overall. Robust consumption growth in July (+6% y/y) was outpaced by refined output growth (+9% y/y), supported by the record levels of mine output (159Kt, +20% y/y).

In the case of the latter, output growth has been well supported by increasing production levels in Brazil (18Kt in July) which has more than tripled from year ago levels as Barro Alto (19Kt expected 2011) and Onca-Puma (11Kt expected 2011) facilities ramp up. In terms of the demand picture in July, China was the key positive influence (+22% y/y) although that was tempered in effect by signs of emerging weakness in both Europe (-5% y/y) and the US (-3%).

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