There's a lot of empty floor space in the London Metal Exchange's warehouses these days, and it means that nonferrous metals will be tight—and pricey—for some months to come. And, much in the way steel scrap prices and steel mill product prices have been influenced lately by Chinese demand, base metals dynamics have a Sino-economic bent to them these days.

Traders say China's hunger for metals to feed its thriving economy has sparked an exodus of metal from the more than 400 warehouses approved by the LME worldwide, including those in North America. This has driven the benchmark exchange's global copper stocks to a seven-year low, and nearly doubled spot prices.

Merchants grumble the producers are bypassing them, rushing to meet booming Chinese orders directly and circumventing storage charges. "There has been a shift to shipping material directly from the country of origin, bypassing the warehouse completely," a metals trader in Singapore tells Reuters News Service. "It's only a matter of time before the warehouse sees itself playing a very diminished role." For example: Chile's state-owned Codelco, the world's largest copper producer, has been releasing a 200,000-tonne stockpile built up in 2003 directly or indirectly into China.

Peter Richardson, head of global commodity research at Deutsche Bank in Australia suggests: "We've seen dominant producers of copper and nickel holding back stocks in rising markets and engaging in direct marketing in a way that has handed them windfall profits. These strategies work when the market is buoyant, but they are costly and dangerous when the market is not." He points out that the world nickel market only averted a supply deficit last year after the largest producer, Russia's Norilsk Nickel, injected 60,000 metric tons from its own stockpile.

Benchmark three-month LME copper futures touched an 8 1/2 year high of $3,055/metric ton ($1.39/lb) on March 2 and traded above $2,800 ($1.27/lb) for most of March, compared to around $1,700 (77¢/lb) a year ago. Copper futures on the LME and the Comex division of the New York Mercantile Exchange both began April rising back to $1.37/lb amid growth in U.S., Japanese and European manufacturing, signaling more future demand for the metal. Spot prices for copper on the LME have averaged well under 80¢/lb since 1989, but closed the first quarter averaging $1.24.

``Demand has improved, there's no question,'' says Michael Mann, president of Colonial Metals Co. based in Columbia, Pa., which uses 80 million pounds of copper a year to make brass and bronze ingot used in housing, defense and industrial equipment. "We're just getting started, we hope," he states.

Similarly, at $17,720/metric ton ($8.04/lb), nickel hit a 14-1/2-year high earlier this year, a landmark also touched by three-month tin prices in March when they hit $8,500 ($3.86) in London.

The LME neither owns nor operates the warehouses. The warehouses are operated by private firms such as Henry Bath & Son, a unit of Sempra Energy of the U.S. The exchange approves warehouse locations "with the objective of having a widespread net-work throughout the world in most of the important areas of net consumption," stated on its web site, http://www.lme.co.uk.

LME copper stocks worldwide fell below the psychological threshold of 200,000 metric tons at the end of March, sliding to 191,750 metric tons, as compared with 812,950 a year ago and a peak of 980,000 metric tons in May 2002. Nickel stocks on the LME were at 15,192 metric tons versus 24,348 a year ago and lead had fallen to 74,325 metric tons from 182,625. What about aluminum and zinc? LME stocks closed March at 1.25 million and 706,800 metric tons, respectively, which were level or higher than they were a year ago. However, the 7,720 metric tons of tin in LME warehouses, from 24,865 metric tons a year ago, would be exhausted in two to three weeks at current rates.

Still, the nonferrous metal shortage may not be acute as dwindling LME stocks alone would suggest. While falling copper stocks are, to a large extent, due to increased consumption and a shortage of metal, speculative traders have been accused of removing copper from LME warehouses and storing it off-warrant, or in private locations.

That's why market analysts believe copper stocks in China are likely to have surpassed global LME stocks. Note: The Shanghai Futures Exchange recorded 120,808 metric tons of copper at its registered warehouses as of March 25. But, traders in Singapore tell Reuters that 300,000 metric tons, including the Shanghai exchange's reserves, have been stored around Shanghai, plus at least a further 50,000 metric tons released in March by China's State Reserves Bureau.