960412

London market on guard for battle royal

LONDON: International commodity traders are squaring up for what could be a battle royal in the London cocoa market later this year, brokers and analysts said.

The London Commodity Exchange (LCE) is closely watching its cocoa market to make sure orderly trading is maintained.

LCE chairman Michael Jenkins told Reuters the exchange has spoken to the major cocoa players and told them it will not permit a disorderly market to develop.

In simple terms the LCE will make sure that the process of grading or checking the quality of cocoa being delivered through the exchange is not swamped by the sheer volume of what could become a very high stakes game.

As an extreme measure it could order liquidation of futures positions but this is very unlikely.

Behind the play off, said to involve three of the world's largest commodity trading firms, are mixed opnions on the extent to which supplies will tighten by end-September before the 1996/97 West African crops start to be harvested.

But traders stress that this potential shortage is fairly artificial in physical terms.

To some extent this is a replay of March last year when a record near 200,000 tonnes of cocoa were delivered through the London futures market to one big U.S. player.

Since the beginning of March this year the LCE has graded over 6,500 lots of 10 tonnes each. In its last financial year the LCE graded 14 percent of the world crop, Jenkins noted.

Some dealers expect heavy grading to continue throughout the summer and for September to see record deliveries. But some of this cocoa could be delivered against May or July futures.

There is an additional play taking place on the price relationship between September and March.

Dealers agreed there was sufficient cocoa to meet industry requirements and described the futures market play as a financial one between professionals. Most industry buyers have secured their needs and were avoiding this "paper play".

Currently the open interest in both September and March futures contracts was over 40,000 contracts or more than 400,000 tonnes for both contracts.

The current total LCE cocoa open interest -- a measures of outstanding contracts -- is at a record level of 158,230 ten tonne contracts. In New York it is 95,907 ten tonne contracts.

On Thursday September futures at around 1,040 stg were trading some 45 stg a tonne above May and traders said this was near the financial cost of buying, storing and redelivering the cocoa in September -- known as the full "carry".

One key reason for the huge open interest was the record size of world production and consumption.

Dealers say the Ivory Coast which accounts for over 40 percent of the world crop of some 2.6 million tonnes, has been an aggressive seller of its 1996/97 crop and has already sold an estimated 450,000 tonnes which would partially explain the large open interest in March -- about 150/200,000 more than at this time last year, traders said.

In addition with its mid-crop yet to be harvested Ghana this year has already harvested its highest crop for 20 years.

Traders estimate Ghana's 1996/97 crop sales, which last year did not start until May, have already reached 25,000 tonnes.

Chocolate makers probably have already bought their needs for the next seven to eleven months. Anthony Ward, head of cocoa trading at Saloman Bros SB.N subsidiary Phibro and some other top dealers reckon industry price cover including futures rather than just physical cover, is some 9-1/2 months of demand.

High first quarter grindings in the Netherlands and Britain could lead statisticians to swing back to predicting a small deficit in world production and consumption in 1995/96.

Dealers and analysts are slightly sceptical on the accuracy of the German consumption indicator and point to an annual gap of some 30,000 tonnes between German imports and grindings over the past three years. If this is true, current expectations of a balanced market will tip towards a deficit and lower stocks.

Despite this, prices were still stuck in a 200 stg trading range between 900 and just over 1,000 stg that has held over most of the past two years. Current prices were below the average for the last two years, Phibro's Ward noted.

"This stock drawdown over the last two years without any rise in prices could lead to an explosive market situation if the 1996/97 crops are low," Ward stated.

The key unanswered questions were whether world production has been hauled to a new higher level by big West African crops, whether the record 1995/96 crops were freakish or whether the real truth lay somewhere in the middle.

In Abidjan, Ivorian Commodities Minister Alain Gauze warned in a newspaper interview on Thursday that traders could be hurt by its plan to process mid-crop cocoa and deprive the cocoa market of supplies which could be diverted to alternative industries such as cosmetics, medicines and soap.

Some traders said this, along with long-term Ivorian commitments to ship cocoa to a major trader to repay earlier debts, could accentuate the potential market squeeze.-Reuter