Mumbai: The expiry of holding contracts with the London Metal Exchange (LME) and an increased exposure by hedge funds in the aluminium industry have been pushing up the prices of the metal globally in the past one month. This is expected to have a positive impact on Indian aluminium prices too, which have remained depressed since last year.

The expiry of holding contracts conventionally releases metal into the market, which when bought by hedge funds firms up the prices. Aluminium on the LME has witnessed a steady rise in the past two months, from levels of $1,325 per tonne to about $1,350 in the January-February period.

“If the trend sustains, then domestic companies could go in for a revision. But this would depend if the hike continues till March 2003,” an official in the state-run Nalco said. Depressed aluminium prices were one of the reasons for a delay in the privatisation of Nalco. The sell-off may be speeded up in May 2003.

All domestic companies, including Indian majors Hindalco and Sterlite Industries, had raised prices in October by Rs 1,000 per tonne on an average by rolling back discounts. “If LME prices remain firm till March, then there is scope for an upward revision,” says a Hindalco official. Domestic companies revise prices quarterly, based on the trends at the LME.

It is learnt that most holding contracts between global aluminium majors and the LME are likely to be over by next month. Major aluminium companies like BHP Billiton, Glencore and CVRD (Brazil) are close to completing their one-year holding agreements with the LME under which the metal was held in warehouses. “Charges for holding the metal remain fixed irrespective of the period,” say analysts.

The LME has more than 350 approved warehouses in 42 locations in 12 different countries. Warehouses are normally located close to the areas of net consumption. Another Nalco official admits that globally there has been an increase in hedge funds’ exposure in aluminium. “This also has been attributed to the steady rise in prices.”

A hedge fund normally takes both long and short positions, uses arbitrage, and buys and sells securities or bonds. It practically invests in almost all opportunities. Such funds are used more for the volatile metal industry, in anticipation of corrections. The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital.

Rising metal prices will also help Nalco with better long-term contracts for its alumina supply. As the state-run aluminium company sells on a spot basis, the company does not normally get good prices.

It has also been learnt that an increased buying has pushed up aluminium prices by $20 per tonne last week. Some industry officials have said that there has been a marginal improvement in physical demand, particularly in East Asia. Also, secondary aluminium smelters have seen a rise in orders with both scrap and ingots ruling steady.