Copper jumped more than 7 percent on Tuesday on buying ahead of an annual re-rating by major commodity indices, but the rally is expected to be short-lived as demand concerns remain.
The Dow Jones AIG annually recalculates the weightings for the individual commodities in its index and is set to raise the weighting for copper traded on the New York Mercantile Exchange's COMEX division. The rebalancing takes place from Jan. 9 to 15.
"The arbitrage effect means that COMEX rallying significantly will also drag up (LME) copper," Leon Westgate, an analyst at Standard Bank, said. He added the reweighting impact will likely be temporary and he expects prices to come under pressure by the middle of January.
Three-month copper on the London Metal Exchange rose as much as 7.2 percent to $3,420 a tonne, the highest level since Dec. 4. It traded at $3,385 a tonne at 1101 GMT.
Copper for March delivery on COMEX is up over 16 percent from its Dec. 26 session trough.
However, the weak outlook for global demand means metal prices are unlikely to hold on to any gains.
Mitsubishi Materials Corp said it won a roughly 70 percent hike in copper processing fees from Freeport-McMoran Copper & Gold, in what is believed to be the first fee rise won by a Japanese copper smelter for 2009.
"The smelters are cutting back and we are seeing capacity relative to availability of concentrates has fallen so TC/RCs are popping up a bit," Westgate said. "This reflects the underlying demand concerns of the wider market."
Copper prices fell more than 50 percent in 2008 due to weakening global demand and rising inventories. Stocks in LME warehouses rose 1,450 tonnes to 343,500, the highest level since February 2004.
"I don't think we'll see the start of a sustained recovery in prices until we see signs that the global economy is really on the path to recovery," Yingxi Yu, analyst at Barclays Capital in Singapore, said.
All the industrial metals were up, with aluminium rising as high as $1,605 a tonne from $1,548 even as inventories continued to climb.
Aluminium stocks rose 11,875 tonnes to 2.35 million tonnes, the highest in over 14 years.
INDEX RE-WEIGHTING
Nickel and zinc were lifted by the re-weighting of the major commodity indices.
The Dow Jones rebalancing will take place from Jan. 9 to 15 and will be based on Jan. 8 closing prices. The reweighting of the S&P GSCI will occur from Jan. 8 to 14 and will be based on closing prices on Jan. 7.
Nickel rose as high as $13,449 a tonne from $12,850 and last traded at $13,315.
Zinc was at $1,310.25 from $1,300. It earlier hit $1,335 a tonne, the highest price since Oct. 15.
Lead was boosted by short covering, rising to $1,153 from $1,120.
Tin rose to $11,725 from 11,500 a tonne.
