Base metals rally on hedging and risk aversion

Copper and other base metals hit a two-week high on the London Metal Exchange (LME) on Friday. Metals have followed equities, as risk aversion is back among investors. In early trades, metals and crude oil were traded at two-week highs, but later prices softened marginally on the news that Fitch Ratings downgraded Spain’s debt rating to AA+ from AAA.

Base metals were still five-eight per cent higher compared to the prices on May 17, which were the lowest since the Greek downgrade last month. Crude oil has risen from below $70 to $74 per barrel, which is still 14 per cent lower then its recent peak seen last month.

At lower prices, some risk aversion and demand for hedging helped prices to improve in the international market. T Gnansekar, director of risk advisory firm Commtrendz, said, “I believe companies should have hedged some of their requirements at lower prices.”
 

ON FIRM GROUND PRICE ON LME IN $/TONNE
Name	17-May	28-May	% change
Copper	6,470.00	6,939.00	7.25
Nickel	20,700.00	21,350.00	3.14
Aluminium	1,990.00	2,043.00	2.66
Zinc	1,900.00	1,936.00	1.89
Brent crude ($/barrel)	74.11	73.26	-1.15
Source: Bloomberg                                                                       Compiled by BSRB

However, the rally seen on Friday might turn out to be a relief rally if weakness in the euro and euro zone persisted, said Gnansekar.

Increased hedging activities took place due to lower metal prices in the past few days, said an industry observer. Most commodities witnessed a 15-20 per cent correction in a month. Some part of the recent rally can also be attributed to cancelled warrants issued for deliveries in the physical market.

On domestic exchanges, hedging happens when the particular commodity contract enters contango when prices in futures fell below spot prices and the difference is more then three per cent. In recent weeks, cottonseed cake, black pepper, barley have seen such activities where traders have sold in the spot market and hedged their purchases in futures. Biren Vakil, director, Paradigm Commodities, said, “Crude oil is another commodity where significant hedging takes place. JPMorgan, Citi and Goldman Sachs have significant hedged positions in crude oil floating storage.”

Copper gained for a third day after slipping in recent weeks on concern that Europe’s sovereign debt crisis may crimp the region’s economic rebound and China might take more steps to restrain its surging economy. Copper for three-month delivery rose to $6,939 a tonne on LME.

Inventories of copper on the LME fell for a ninth day to 476,725 tonnes and are headed for a third monthly drop in a row. Nickel for three-month delivery on LME fell on Friday to $21,350 a tonne.