* LME prices reflect global benchmark
* Pick up in metals hedging by corporates
* Zinc may have made Chinese authorities rethink lead
By Pratima Desai
LONDON, Jan 27 (Reuters) - A global financial system awash with liquidity and tighter policy and margin requirements in China helped volumes on the London Metal Exchange (LME) surge in the final quarter of last year.
LME copper futures volumes jumped more than 19 percent in the final quarter of last year to 206 million tonnes, confirming its role as a global benchmark, analysts said.
On the Shanghai Futures Exchange (SHFE) copper volumes in the final three months of 2010 tumbled 25 percent to 49 million tonnes. In the third quarter of last year copper volumes on the LME fell 4.4 percent and on SHFE they fell 17 percent.
"China has been tightening policy, the rest of the world -- the United States and Europe -- hasn't. Bernanke sanctioned more quantitative easing, that liquidity has benefitted the LME," said Robin Bhar, analyst at Credit Agricole.
"The Shanghai exchange raised margin requirements in the last quarter to quell speculative activity."
U.S. Fed Chairman Ben Bernanke said last August economic recovery had weakened more than expected and that it stood ready to act if needed to spur slowing growth. [ID:nLDE67T02D] [ID:nN25283937]
Taking that as their cue, commodity and equity markets have
since soared with benchmark copper
"Easy money, low interest rates are themes outside China ... The LME reflects a global benchmark and strong activity outside China," a UK-based fund manager said.
"We've seen manufacturers restocking, their supplies are depleted ... There has been a pick up in corporate hedging."
SHFE raised trading margins and limits for all contracts to curb speculation last November. The move followed similar measures by China's other two big commodity exchanges, in Zhengzhou and Dalian. [ID:nTOE69P07B] [ID:nTOE6AL06J]
Raising trading margins deters speculation as traders have to post a higher deposit with the exchange before any trade can be accepted, making each trade more cash-intensive.
Also weighing on metals trading activity in China has been the prospect of further monetary tightening through interest rate rises and lending restrictions. [ID:nTOE6BD02R]
CHEAPER VERSION
LME volume data was provided by the exchange or taken from its website. SHFE numbers came from the Reuters database.
Trade sources say SHFE includes both sides of the deal in its volumes. The tonnage traded on SHFE has been calculated using the volume numbers divided by two.
LME aluminium volumes climbed 16.7 percent in the fourth quarter from the third quarter to 323 million tonnes, while those for SHFE aluminium rose 33.8 percent to 20.7 million tonnes. LME aluminium volumes fell 4.4 percent in the third quarter of 2010 and in Shanghai they fell 20.1 percent.
The LME declined to comment, but in an earlier release it said. "Despite, or perhaps because of, the volatile global economy, 2010 was again a very strong year for the LME."
"With a $11.6 trillion notional market turnover on the exchange ... the LME's position in the global economy remains extremely important."
Zinc futures volumes on the LME rose 5.7 percent to 115 million tonnes in the fourth quarter from the third quarter and on SHFE a fall of 32.2 percent took volumes to 184 million tonnes. LME zinc volumes fell 9.4 percent in the third quarter and in Shanghai the rise was 52.3 percent.
Perhaps epitomising most the speculative nature of trading in Shanghai is the zinc contract.
"It was used as a cheaper version of copper by locals," a trader said. "Given their experience of zinc we think the Chinese authorities are looking again at whether they will allow futures on lead or on coking coal."
Copper is used widely in the power and construction
industries, lead is a key component of batteries and coking coal
is an ingredient for steel.
FACTBOX-Metals volumes traded on LME and SHFE
[ID:nLDE70Q0K9]
(Reporting by Pratima Desai; editing by Alison Birrane)