BASE METALS: LME Metals Down; Seen Drifting Lower

Base metals on the London Metal Exchange are being dragged into negative territory by a stronger dollar Wednesday, and are expected to continue to drift sideways to lower in the short term as investors weigh up market fundamentals against persistent global growth fears, particularly amid deepening debt troubles in the euro zone.

Europe's sovereign debt crisis remains in the spotlight again this session after Moody's lowered the long-term debt rating of Societe Generale SA (GLE.FR) and Credit Agricole SA (ACA.FR), citing funding and liquidity problems for SocGen and Greek exposure for Credit Agricole.

Investors are now awaiting news from the conference call to be held later in the global day between Greek Prime Minister George Papandreou, German Chancellor Angela Merkel and French President Nicolas Sarkozy.

VTB Capital analyst Andrey Kryuchenkov said macro uncertainty is still deterring fresh investor inflows into the base metals complex, with open interest generally low across most markets.

At 1022 GMT, LME three-month copper traded at $8,691 a metric ton, down 0.9% on Tuesday's PM kerb close. It is now down $566, or 6.1%, on the start of the month.

A slight improvement in equity markets, with European stocks trading higher, should help sentiment, though, and slow the "dash to cash" which has been seen across world markets, said a trader.

The positive tone followed a report in China's Caijing magazine which stated China is willing to buy bonds of European countries hit by the sovereign debt crisis, citing a vice director at China's economic planning agency.

Meanwhile, across other markets three-month aluminum was down 0.5% at $2,358.50/ton, three-month zinc was 1.1% lower at $2,169/ton and three-month nickel had dropped 1% to $21,094/ton.

Three-month lead was 1.5% down at $2,352/ton, while thinly-traded tin had posted the largest decline, trading 1.7% lower at $23,250/ton.

While macro news continues to dictate direction, market fundamentals have been little changed in recent weeks, and should cap the downside for a number of the metals, participants say.

Standard Chartered analyst Dan Smith said while the metals have been pulled lower by drivers in other financial markets, prices have "proven to be surprising resilient."

"The sector remains well supported by a high cost base, with the notable exception of copper, and inventory which is being tightly held due to low financing costs and low expectations for interest rates," he said.

Smith added that while the bank has a neutral short-term view on base metals, as euro zone debt troubles continue to keep investors on edge, it continues to have a bullish bias over the medium term.

-By Rhiannon Hoyle, Dow Jones Newswires; +44 (0)20 7842 9405; rhiannon.hoyle@dowjones.com

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