Humeyra Pamuk

LONDON — Reuters Last updated on Tuesday, Aug. 18, 2009 07:22AM EDT

Industrial metals rallied on Tuesday, recovering from a sharp sell-off in the previous session, as a stronger euro, higher equity markets and investors betting on renewed metals demand boosted prices.

Aluminum AL-FT was up more than 4 per cent, shrugging off a massive rise of over 20,000 tonnes in inventories as a dam accident in Russia raised the possibility of RUSAL, the world’s top producer of the metal, cutting output by at least 500,000 tonnes.

The euro extended gains versus the U.S. dollar and European shares climbed higher after Germany’s ZEW economic sentiment index rose way above expectations, reinforcing investor optimism about a recovery while markets await key U.S. housing data, due at 1230 GMT.

Copper HG-FT for three-month delivery on the London Metal Exchange was at $6,165 a tonne by 0958 GMT, versus Monday’s close of $6,050 a tonne while aluminum climbed to $2,038 a tonne from $1,960.

“We see the market balancing after a big drop yesterday,” said Jesper Dannesboe, senior commodity strategist at Societe Generale. “To be particularly bearish on commodities is dangerous, given all the money going into this asset class.”

Copper gained nearly 40 per cent since early July as funds poured money into industrial metals, betting the worst is over in the global recession and that the latter part of the year will see stronger metals demand.

“Basically, the trend is ‘Don’t get in the way of the funds because they’re going to pump up the prices’,” an LME trader said, adding he expected aluminum to climb to $2,100 a tonne in the coming days.

Ten people died and more than 60 are missing after a turbine room flooded on Monday at Russia’s Sayano-Shushenskaya hydroelectric power station, Russia’s largest, which also feeds two of RUSAL’s Siberian smelters, prompting the company to consider an output cut.

Aluminum inventories are at record highs of 4.57 million tonnes.. But most of the metal being tied up up in deals to release cash for producers could propel prices to new highs, some analysts say.

However, there are still many skeptics.

“I find base metal prices staggering and without basis – I can see no justification for copper and nickel to be so strong and this would suggest to me that we need to be prepared for a major setback soon,” said a metals trader.

Other LME metals also took off, with nickel rising 5 per cent after a 3 per cent fall on Monday. The metal was last at $19,840 a tonne versus $18,900.

Tin gained to $14,2225 a tonne from Monday’s $13,905/13,910 a tonne while zinc was at $1,820 a tonne from $1,770 and lead was up at $1,845 from $1,780.