METALS-LME Zinc Up on Arbitrage Buys; Copper Gains

SINGAPORE, Sept. 20 -- Shanghai copper futures were steady on Monday and London futures flirted with last week's near-five month high, while zinc prices jumped around 2 percent, rallying on heavy arbitrage buying.

Three-month zinc on the London Metal Exchange CMZN3 rose $36.75 to $2,187.75 a tonne by 0330 GMT, in very heavy volume. Almost 1,200 lots changed hands, dwarfing the 650 lots of copper, which traditionally dominates Asian trading.

"The differentials for zinc are widening and there is money in arbitrage, unlike copper," a dealer in Singapore said. "We are seeing very good business on the LME, and a little surprising what with all the holidays this week."

Accounting for China's 17 percent value added tax and the 5 percent duty on imported zinc, Shanghai futures traded at a premium of around 300 yuan to LME metal.

Trading activity was expected to slow this week due to market holiday in Japan on Monday and Chinese holidays from Wednesday to Friday. China will also be shut for a week from Oct 1.

LME copper CMCU3 rose $40 to $7,760, having ended Friday $20 higher, and flirting with a 4-½ month peak at $7,810 struck during the previous session.

The dollar weakened by around 0.2 percent versus the euro EUR= and the currency basket .DXY, but there was no sign of the deluge of yen selling by Japanese authorities that last week sent the dollar roaring higher.

Comments last week from Chinese policymakers that the nation would keep an appropriately loose grip on monetary policy helped drive commodity prices as measured by the Reuters/Jefferies CRB Index .CRB up 1.4 percent last week, its fourth gain in succession.

Market are now attuned to Tuesday's Federal Reserve meeting, alert for any signs of if and when the central bank will launch a second round of quantitative easing in an effort to boost liquidity.

"People are nervous ahead of the holidays and weak shorts are getting squeezed, capitulating on fears after the break we will see more spending on infrastructure -- low-cost housing in China and roads, rails and runways in the United States," Jonathan Barratt, managing director, Commodity Broking Services.

"I can see us breaking above $8,000 within a month. We only need a 1 or 2 percent rally from here to trigger a lot more buying."

LME tin CMSN3 was flat having closed at $23,600 on Friday, but the market's 13 percent rally in the past two weeks to a two-year peak is unsustainable from a technical perspective.

"Tin has developed a parabolic trend," said Daryl Guppy, managing director of Guppytraders.com, noting that this pattern of rapid acceleration collapses when the trend line becomes vertical.

"This will occur around the end of September. The trend may collapse sooner, but the key feature is the rapidity of the price retreat in this style of trend with retracements of 60 percent to 80 percent of the original up move."