Nickel tumbles after LME changes rules

LONDON, June 7 (Reuters) - Nickel fell almost six percent on Thursday after the London Metal Exchange changed lending rules to free up more metal, analysts said.

The nickel market, with prices hitting $51,800 a tonne in May and rising some 40 percent this year, has been characterised by extreme tightness with low stocks in LME warehouses and strong use in China.

The LME amended its lending rules, lowering the limit at which holders of dominant long positions are required to lend to the market, late on Wednesday.

"They are lowering the lending rules because they want to make more metal available to the market," analyst Michael Widmer at Calyon said. [ID:nL07105313]

Two-thirds of nickel output goes to produce stainless steel and buoyant demand has made it hard to get hold of the metal, which makes steel harder and more durable.

Nickel for delivery in three months closed down $2,700 at $42,900 per tonne, its lowest since March 27.

"The weaker tone has been mainly engineered by the LME changing its lending rules today," analyst Edward Meir at Man Financial said.

Tight market conditions had pushed the backwardation -- the premium for cash metal over the three-months price -- to $4,000 on May 29, but on Thursday the nearby spreads fell to $1,200.

"The LME has detected collusive behaviour in the trading of the nearby nickel contract and acted to tighten the lending guidelines for the metal significantly," economist John Kemp at Sempra Metals said in a report.

The guidelines impose lending guidance where two or more market counterparties, who are nominally independent, hold positions which are individually small but collectively large -- enough to hold the rest of the market in thrall, Kemp said.

Stocks in LME-registered warehouses have risen by around 8 percent in June to 8,604 tonnes but remain down from some 36,000 at the beginning of 2006.

Analysts said prices had been overstretched, triggering substitution in the stainless steel industry.

"Nickel will again look attractive when prices are trading in the $30,000-40,000...range," analyst Robin Bhar at UBS said in a report.

China's Baoshan Iron and Steel Co. will raise production of low-nickel stainless steel to reduce costs amid high nickel prices, a senior executive said.[ID:nHKG116348]

Also, stainless steel scrap prices have turned lower due to mill production cuts and substitution, officials said at a conference in Hong Kong.[ID:nHKG180433]

FUND SELLING

Possible disruptions and a continued drawdown in stocks helped support copper, with LME stocks declining by 775 tonnes to 122,275, down by about 40 percent since February.

Three-months copper closed up $15 at $7,435.

In New York, copper for July delivery settled down 2.70 cents to $3.3770 a lb on the New York Mercantile Exchange's COMEX division, after trading a session range between $3.3485 and $3.4125.

Mexican workers have postponed the threatened start of a strike at the Cananea mine and other operations owned by copper giant Grupo Mexico until June 15. [ID:nN06438036]

Disruptions at mines, delays in bringing new production on stream and strong demand for metal would continue to underpin prices, the manager of the $9.8 billion Merrill Lynch World Mining Fund told Reuters. [ID:nL06196367].

Aluminium prices fell after the options expiry on Wednesday.

"After the option expiry yesterday funds are selling and you can see plenty of short positions building," an LME trader said.

Aluminium closed at $2,736 from $2,748, zinc was at $3,650, down $20, lead was down $25 at $2,280 and tin was down $25 at $13,875.

(Additional reporting by Daniel Magnowski in London and Chris Kelly in New York)

Copyright © 2007 Reuters Limited. All rights reserved. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of Reuters Limited

Copyright © 2007 Yahoo! Singapore Pte. Ltd. (Co. Reg. No. 199700735D). All Rights Reserved.
Privacy Policy - Terms of Service - Community - Help