* To focus 1st on metals, agri goods; move into energy later
* Surging prices forcing China companies to rethink hedging
(Adds context and quotes from paragraph 5)
By Fayen Wong
SHANGHAI, Jan 19 (Reuters) - Societe Generale plans to offer over-the-counter commodity derivatives products in China this year as it looks to tap into growing demand from Chinese enterprises to manage price risks, a bank official said.
The French bank will focus first on launching base metals and agricultural products before expanding into energy-related instruments in the future, said Rutie Zhang, Societe Generale's head of commodity derivatives sales for China, on Wednesday.
"We have started to contact potential customers, and we are targeting to have 20 to 30 customers by year-end," Zhang told Reuters in an interview, adding that the bank hoped to at least treble its customers within two to three years.
"The Chinese market is huge. There are thousands, tens of thousands of local firms which we can market our hedging instruments to," Zhang said, adding the French bank intended to work with local and other foreign banks that do not have trading capabilities on overseas exchanges.
SocGen's foray into the OTC derivatives markets in China comes after regulators introduced stringent terms recently that caused parts of the once-flourishing business to grind to a halt.
China cracked down on the sale of derivative products by foreign banks to Chinese enterprises in 2009, after some state-owned companies lost billions in derivatives contracts.
Trading volumes plunged as many state-owned enterprises shunned OTC derivatives and as foreign banks could offer only the simplest of products.
But Zhang said surging commodity prices are again forcing companies to rethink their approach to managing price risks, adding he had seen increased appetite from both Chinese state-owned and private enterprises to hedge their costs.
"There are many things they can do to mitigate the risk, depending on what they are exposed to and what their risk management strategy is," he said.
Societe Generale, which will offer derivatives products based on offshore operations, is one of the few foreign banks that are permitted to conduct commodity derivatives business in the mainland. Apart from the 31 state-owned enterprises, other Chinese firms are not allowed to trade on overseas exchanges.
Although Chinese firms are allowed to trade on local exchanges, contract limitations mean some China metal consumers may find products offered by the Shanghai Futures Exchange (SHFE) less relevant than those on overseas bourses.
For example, Zhang said, budget cycles for corporations are usually planned on an annual or multiple-year basis, which means limitations of the SHFE -- with most of its liquidity concentrated in third-month contracts -- make it less useful for these end-users to get an effective hedge.
HOPES FOR BETTER ACCESS
SocGen hopes to eventually set up a commodities trading desk in China, Zhang said, but will depend on whether regulators ease a ban on access by foreign banks and financial institutions to Chinese exchanges including the SHFE and Dalian Commodity Exchange.
With China buying nearly a third of the world's copper, half its steel and half of globally traded soybeans, SocGen is not alone in wanting to gain access to its commodity markets.
Domestic banks are also barred from trading futures as part of Beijing's broader scheme to limit price volatility.
Zhang said China urgently needs to allow its derivatives markets to develop, because hedging needs to play a greater role in companies' risk management strategy, especially given that volatility in commodities prices is set to stay.
"There have been successful hedging stories amongst China's state-owned enterprises. Some of them would not have survived if they did not have the hedging policies in place during the financial crisis in 2008," Zhang said.
"Companies should not use derivatives as a way to speculate, and banks should not sell overly complex products without explaining the potential downside," he added (Editing by Jane Baird)