Industrial metals set to end 2016 with stellar gains

By Pratima Desai

LONDON (Reuters) - Industrial metals on the London Metal Exchange have had one of their best years in recent history as receding worries about demand and expectations of tighter supplies fuelled a buying spree that took zinc prices to nine-year highs.

Zinc is on course to end 2016 up about 60 percent, tin 43 percent and copper 17 percent, its first annual rise since 2012.

Markets started the year on a sombre note due to weak demand growth in top consumer China and massive supply overhangs. Over the course of 2016 the mood brightened as Chinese authorities pumped money into the economy, much of it into infrastructure.

That was reinforced by optimism about growth after Donald Trump won the U.S. Presidential election in November, providing another reason for funds to jump on the bandwagon.

"There was a sea-change in sentiment after the U.S. election," Newgate Asset Management Chief Executive Mike Frawley said. "Expect to see weakness over coming months; seasonal factors and the stronger dollar."

The Chinese New Year holiday in the first quarter of next year will mean slowing manufacturing activity, while the U.S. currency is near 14-year highs, making metals priced in dollars more expensive for non-U.S. firms.

The focus next year will remain on China, which accounts for about half of global demand for base metals.

"There are still some quite big risks to demand for copper," said Allianz Global Investors UK equities portfolio manager Matthew Tillett. "China hasn't really rebalanced its economy ... and we all know that's not sustainable long term."

Copper was up 0.7 percent at $5,526 a tonne at 1058 GMT and zinc rose 1.6 percent to $2,562 a tonne.

Mine closures, tight supplies and expectations of deficits have pushed zinc up this year.

But stocks in exchange warehouses and elsewhere totalling nearly 2 million tonnes or about seven weeks of usage are potentially negative for zinc, as is the rebalancing of commodity indices in January.

"For zinc, the selling of 12.2 percent of the daily volume over each of the five days represents a decline of 10.9 percent in total open interest," Societe Generale said in a note. "In total 8,423 lots of zinc will need to be sold on the close."

Tin was down one percent at $20,830. A tight LME market, where inventories are hovering near eight-year lows of 3,660 tonnes, or less than one week's consumption, are one reason for its gains this year.

Aluminium was up 1.2 percent at $1,700, lead rose 2 percent to $2,010 and nickel was down 0.1 percent at $10,115 a tonne.

PRICES Three month LME copper

Most active ShFE copper

Three month LME aluminium

Most active ShFE aluminium

Three month LME zinc

Most active ShFE zinc

Three month LME lead

Most active ShFE lead

Three month LME nickel

Most active ShFE nickel

Three month LME tin

Most active ShFE tin

(Additional reporting by James Regan; editing by Helen Reid)