LME volumes seen firm in 2009

By Anna Stablum - Analysis

LONDON (Reuters) - Trading activity on the London Metal Exchange will be boosted by investors and high volatility this year, but volumes are unlikely to beat last year's record because producers and consumers are expected to stay away.

The exchange saw volumes rising 22 percent to 113 million lots from 2007 as investors were attracted by limited supplies and firm Chinese demand pushing the benchmark copper contract to a record high of $8,940 per tonne last July.

Since its high the three-month futures of the metal, used in power and construction, are down more than 60 percent on fears of a global recession triggered by a collapse in financial markets forcing liquidations across commodities.

"It could be difficult to sustain the very big increase we saw last year," said analyst Kevin Norrish at Barclays Capital.

Demand for metals, credit availability and hedge fund flows will be key factors determining the size of the volumes in 2009.

But the decider will be hedging -- a strategy to minimise exposure to price risk -- by consumers and producers, which is expected to decline because of poor demand for metals.

"Consumers are looking to lock in prices for the future but most of our customers cannot take large positions," one physical trader said, adding only a few customers had shown extra interest with metals prices hovering close to last year's lows.

A hedge is a position established in one market in an attempt to offset exposure to the price risk of an equal but opposite obligation or position in another market.

Few producers would be keen to sell far forward at these relatively low prices, but high volatility would push many consumers and producers to cover some of their price exposure.

"You need to have the guarantees against those positions and it costs money," the trader said, adding trading was limited by the global credit crunch which was making it harder to finance any deals.

Dugald Ross at Castlestone Management, an alternative asset manager, expects trading volumes to be down in every commodity market due to the reduction in the leverage of hedge funds.

"Once the appetite for risk returns then we should see increasing volumes again ... (But) I would be very surprised to see any new volume records broken in 2009," he said.

RETURN OF DEMAND AND RISK APPETITE

Producers and consumers are expected to hold back from the market at least during the first quarter of this year and volumes will depend more on the investment community, analyst Stephen Briggs at RBS Global Banking & Markets said.

"If there is a reduction it is going to be because there is less investor involvement," he said.