March 9, 2016 / 6:46 AM / 4 years ago

Volatile yuan spurs China copper trade to hedge currency risk

HONG KONG (Reuters) - Chinese copper importers and investors are starting to hedge currency risk following a sharp spike in the volatility of the yuan, cutting already thin margins for traders and arbitrage players.

An employee unloads copper at a factory in Nantong, Jiangsu province, June 18, 2011. REUTERS/China Daily

China, the world’s top copper importer, bought nearly 3.7 million tonnes of refined copper last year worth $17.8 billion, while the metal is one of the most liquid commodities in China’s futures markets. [MTL/CHINA1]

Importers and investors have traditionally ignored currency risk for forward shipments or futures contracts, given the yuan’s relative stability, but volatility jumped after Beijing devalued the currency in August last year.

“We started hedging because we are afraid that exchange rates will be volatile,” said a trader at a large Chinese trading house, who declined to be identified as he was not authorized to speak to media. “Some professional importers had recorded losses.”

The firm now hedged yuan for all term import shipments and spot imports priced on the monthly average of the London Metal Exchange (LME), he said.

Hedging attracted a handling fee of about 0.00017 percent of the value of a contract, eating up about a quarter of a trader’s margin, traders said.

Yuan volatility has also affected futures investors trading arbitrage between international markets such as the LME and the Shanghai <0#SCF:> market.

Many Chinese clients who had refused to hedge yuan previously started hedging late last year or were inquiring about currency protection, said sources at an international bank and brokers in London.

“I am absolutely sure that they are doing a lot more in renminbi now than they were six months ago because there is a need for them to do it,” said Andy Gooch, CEO of LME ring dealing member GF Financial.

“Chinese authorities are now less interested in where the currency is against the dollar, but more interested in where it is against the basket,” he said, adding to volatility for traders looking at London-Shanghai arbitrage, which mostly depends on U.S. dollar movements.

A senior trader at a large trading firm in Shanghai said the strong yuan of recent years had added to arbitrage margins in a market where traders are happy to take a five percent profit.

“We made an extra 3 percent profit by not hedging. Now, I think we are better to hedge yuan if the charge is low. The yuan’s fluctuations are quite wide ... and we are not clear on the central government’s macro policies,” he said.

Additional reporting by Saikat Chatterjee, and Clara Denina and Pratima Desai in LONDON; Editing by Richard Pullin

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