Zinc

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Wild price swings seen in zinc, nickel in January

By Pratima Desai

LONDON, Dec 13 (Reuters) - Zinc and nickel are expected to experience wild price swings in January as a commodity index buys the metals, prompting increasing levels of speculation.

Between January 8 and 14, the Dow Jones AIG commodity index will adjust the weighting of many commodities including zinc, nickel, copper and aluminium traded on the London Metal Exchange (LME).

The adjustment is likely to involve the purchase of about 250,000 tonnes of zinc and 10,000 tonnes of nickel. Both metals are used to make steel.

To put those numbers into perspective, stocks in LME warehouses now stand at around 77,000 tonnes for zinc and at 46,000 tonnes for nickel.

"If you look at buying relative to market size, the rebalancing is probably going to have its most significant impact on zinc," said Michael Jansen, analyst at JPMorgan.

"It will also be very friendly to nickel."

Zinc in the DJ AIG Commodity Index will next year account for more than 3 percent of the allocation, up from 1.4 percent as calculated at current prices. Nickel will rise to 2.8 from 1.7 percent.

If prices rise between now and January 8 the amount of nickel and zinc that the index needs to buy will be lower.

"My reading at the moment is that both zinc and nickel will benefit from the reweighting," said Dan Smith, analyst at Standard Chartered. "But it is complicated because it depends on prices at the time."

WILD SWINGS

The index uses the benchmark LME three-month future, so the focus will be on contracts for delivery in March 2008.

Copper and aluminium will also be on the radar as they too have a higher allocation. But the impact is unlikely to create any tensions as both markets are thought to be liquid enough to absorb large amounts of index-related buying.

For zinc and nickel, which usually sees much smaller volumes of trade, the extra demand could create wild price swings.

Hedge funds and other speculators are starting to buy zinc and nickel for delivery in March on price dips. But traders think most of the buying will be done between January 2 and 7.

Much of that will be reversed during the rollover period -- the fifth and ninth working days in January, or January 8-14.

"The reweighting does have an impact on pricing over a period, but it is short-lived," said Adam Rowley, analyst at Macquarie Bank.

How big the move is depends on how much money is invested in products based on the DJ AIG commodity index. Analysts estimate it at between $45 and $50 billion.

The DJ AIG is the second most popular index after the S&P GSCI -- estimated to manage $80-$90 billion out of a total of $160 billion invested in commodity indices.

The S&P GSCI is unlikely to affect the metals markets as it is heavily weighted -- about 70 percent -- towards energy.

"The S&P index isn't going to be relevant for us ... Some funds are already front-running the DJ reweighting," said a senior metals trader at a commodities brokerage.

"Last year some prices fell during the actual rollover period ... A case of buy on the rumour, sell on the fact. Nickel was on the buy list last year."

Analysts say nickel is on the list again because prices, which hit record highs above $50,000 a tonne in May, are now at around $26,000 a tonne and below the levels above $30,000 seen in January 2007.

Zinc prices at around $2,400 a tonne are also below the levels near $4,000 a tonne seen in January 2007.

(Reporting by Pratima Desai; Editing by Chris Johnson)

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