Chinese copper smelters reduce overseas hedging

HONG KONG, May 16 (Reuters) Chinese copper smelters are reducing hedging of their future production in overseas futures markets because of record-breaking world copper prices and higher export taxes, smelter officials said on Tuesday.

Lesser price protection for future production could expose the smelters to high risks should the price suddenly turn around, since the prices of their imported raw materials are based on the price of copper.

China is the world's largest copper consumer but produces only a third of its copper concentrate, the main raw material for the metal.

''Chinese producers do not hedge much now. Amid high spot prices, smelters' needs of hedging are weaker as the risk of the price falling below their costs is small,'' said an official for Jiangxi Copper Co. Ltd., China's largest copper producer.

Jiangxi is expanding annual capacity to 700,000 tonnes in June 2007 from 400,000 tonnes.

The official also said Jiangxi had reduced its overseas hedging because of higher export taxes, raising the costs of the metal's delivery against such hedging. China last month doubled its export tax on copper to 10 percent.

''We have not had any overseas hedging positions since ,000,'' said an official for a smelter in the north of the country. ''I cannot stand people calling me all the time for margins.'' Copper prices on the LME reached ,000 a tonne in November last year.

A Chinese copper smelter normally hedges by taking a short position on the London Metal Exchange to cut risks of future price declines. When the LME price rises above that of the short position, the smelter's broker usually would ask the client to add a deposit, commonly called a margin call, to secure that position.

''We do not have such cash flows to follow big price rises,'' said an official for another Chinese smelter, which produces about 80,000 tonnes of copper a year.

Smelter officials said China's controls over outflows of foreign currencies added pressure on smelters' overseas margin calls.

Selected Chinese companies are required to get approval from the China Securities Regulatory Commission (CSRC) and the State Administration of Foreign Exchange when sending foreign currencies to meet their overseas margin calls, a CSRC official said, adding the futures watchdog alone took two to three days to process this approval.

Smelter officials said the process of getting those approvals could take about 10 days. But the benchmark three-month LME copper prices rose nearly 16 percent last week alone, ranging between ,480 and ,660 a tonne.

To help hedge imported copper concentrate, Chinese smelters and overseas suppliers settled prices of the imports two to three months after the concentrate was loaded, giving the smelters time to produce and then sell spot copper made from the imports, the officials said.

But analysts are urging smelters to start increasing hedging locally because they face weaker copper demand in July to August.

''In a bull market, we suggest clients reduce hedging or even not to hedge,'' Yun Zhijie, Shanghai-based analyst for Changjiang Futures, said. ''But now they should consider gradually increasing hedging.'' REUTERS PV GC1432