Copper rose the most in almost three weeks in London, heading for the first weekly gain in four, and zinc traded at a 16-month high on concern supply will remain tight amid shrinking inventories.

Copper stockpiles monitored by exchanges in London, Shanghai and New York fell 47 percent since March to the lowest since 2008. Zinc stockpiles monitored by the London Metal Exchange slumped 28 percent since the start of the year. Prices also gained after “encouraging” U.S. manufacturing and jobs data yesterday, RBC Capital Markets LLC said in a report today.

“Chinese consumption growth remains strong, keeping inventories in check,” Daniel Hynes and Victor Thianpiriya, analysts at Australia & New Zealand Banking Group Ltd., wrote in a report today, referring to copper.

LME metal is heading for the biggest weekly increase since March 28. Market open interest, or the number of futures outstanding, fell to the lowest since Jan. 30, 2013, as of June 18, exchange data show. Falling open interest and higher prices suggest short-covering, according to Macquarie Group Ltd. Short-covering denotes purchases to close out bets on lower prices.

Copper stockpiles monitored by the Shanghai Futures Exchange fell for a fifth week to 75,529 tons, the lowest since 2011, data from the bourse showed today. Inventories tracked by the LME slipped 2.6 percent this week to 159,425 tons, the lowest level since 2008, daily exchange figures showed.

Inventory financing issues in China, where authorities are investigating whether some metal at Qindgao port was counted more than once as collateral for loans, are “overstated” and “won’t kill demand,” ANZ analysts wrote.

David Fuller's view

There is clear evidence that the highly cyclical mining sector is about to turn upwards.  We have seen it over and over.  1) As the global economy commences a recovery, miners are slow to increase supplies because they have been through hard times and metal prices are low.  2) Global GDP growth pushes up demand for metals and prices begin to rise.  3) Shortages appear as GDP growth continues so miners begin to increase supply against a background of high prices.  4) Central banks begin to tighten monetary policy and GDP growth starts to slow, lowering demand for metals but miners usually keep on producing not least because they have increased their output capability.  5) Recessions appear and metal prices slump on too much supply and falling demand.  6) Miners reduce supplies against a background of weak global GDP growth and low metal prices.  Central banks provide monetary stimulus which eventually helps economic recoveries to occur but miners are slow to increase supplies because they have been through hard times.    

Where are we today?  I think we are in the early to middle phase of stage 2 above. Nickel led the recovery because of a supply reduction by Indonesia, but quickly became overextended and a lengthy consolidation is underway.  Supply concerns are currently lifting Zinc up out of its base formation.  Aluminium and Tin are currently in the latter stage of these lengthy base formation development stages, evidenced by the rising lows.  Lead is lagging and has yet to show evidence of rising demand in the form of higher reaction lows.  Copper, which has often been at the forefront of cyclical advances in earlier decades, is currently lagging, having hit a new reaction low at yearend 2013.  However, this appears to have been a failed downward break and we may be seeing the formation of a higher reaction low this week.   

(See also Eoin’s comments below on the Central and South American resources economies.)