•Metal Users Reduce Hedging After Orders Drop on Slump (Aluminum Supplies Doubled)

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Metal Users Curb Hedging After Orders Drop, Deutsche Bank Says
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By Chanyaporn Chanjaroen

Oct. 13 (Bloomberg) -- Consumers of copper, aluminum and other industrial metals are hedging less of their future purchases this year after orders were decimated by the financial collapse, Deutsche Bank AG said.

The global economic slump, the worst since the 1930s, led to “demand destruction,” said Ray Key, the bank’s global head of metal trading. That spurred manufacturers and other buyers outside of China, the world’s largest metal consumer, to run down stockpiles, he said in a phone interview.

“There has been a lot less consumer hedging than what you would normally see,” said Key, who began trading metals in 1999. “There was too much uncertainty around future demand for consumers to accurately forecast future hedging requirements.”

The London Metal Exchange index of six industrial metals plunged 49 percent last year as the world economic crisis, which started with the collapse of the U.S. real-estate market in 2007, triggered $1.62 trillion of writedowns and credit losses at financial institutions.

The index rebounded 72 percent this year as copper and lead more than doubled on demand from China. Investors also bought commodities to hedge against a decline in the dollar, on speculation that inflation would accelerate and that a recovering global economy would use more raw materials.

“If consumption picks up, this combined with the investor demand could drive some large price rises,” Key said Oct. 8.

Copper Producers

Copper producers were until recently selling their future production to lock in the rebound in prices, Key said. They now appear to be targeting prices at $6,500 a ton or higher, he said. Prices have reached no higher than $6,549 this year. Forward selling by producers typically curbs gains in prices.

“There’s some strategic hedging decision going on at the board level of large copper producers in terms of their outlook over the next two, three years after witnessing such a dramatic fall earlier this year,” Key said.

Copper for delivery in three months on the LME reached a record $8,940 a ton in July last year, before slumping as low as $2,817.25 by December.

Key, 36, re-joined Deutsche Bank as the head of metals trading in 2007 after five years with Morgan Stanley, where he was global head of precious metals. He started his career at Bankers Trust in 1995 and took on metals when Deutsche Bank bought Bankers Trust in 1999.

Exchange-traded products physically backed by precious and industrial metals will be “a focus point going forward” for the metals industry, Key said. Still, only those metals with large stockpiles, such as aluminum, have the potential to attract significant funds, he said.

Aluminum inventories monitored by the LME almost doubled this year, reaching a record last month. Exchange-traded products backed by metals with smaller available stockpiles have the potential to spur greater price swings, Key said.

To contact the reporter responsible for this story: Chanyaporn Chanjaroen in London at cchanjaroen@bloomberg.net
Last Updated: October 13, 2009 01:29 EDT