Volatile metal prices are increasingly persuading consumers of industrial metals to hedge their risk in world markets, London-listed Standard Chartered told Reuters this week. Skyrocketing and fluctuating metals prices have hit profit margins of the companies that use metals to make products because they have not been able to pass on rising costs.
"Many of the new clients that we are bringing into the market are on the consumer side," said Jeremy East, global head of commodity derivatives trading at Standard Chartered, which has recently become a London Metal Exchange member.
"(Volatility) is encouraging them...These companies realise that commodities are becoming one of the most volatile factors in their business. Many of them are looking to hedge to reduce that volatility," East said.
Copper, seen as a gauge of the real economy, peaked at $8,800 a tonne in May 2006, and though now below that level, it is still 22 percent higher than at the start of this year.
Volatility can be seen in relatively illiquid contracts like tin, lead, and nickel, which have all this year hit record highs, but are now much lower. Nickel has lost 50 percent over the last three months and currently trades around $30,000.
"Rising costs of commodities has a direct impact on their bottom line...Having the ability to hedge and lock in the costs of their commodities for their budgeting process is a big benefit," East said.
"It is not just the higher prices, it is the volatility." East said his firm had a wide range of clients, varying from funds to producers, eager to hedge in international markets. The massive inflow of money into commodity markets over the past five years was the result of an attempt by investors to diversify their portfolios, he said.
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