Korean Agency to Raise Metals Purchases on Price Drop

By Sungwoo Park and Paul Gordon

Dec. 11 (Bloomberg) -- South Korea, Asia’s third-biggest metals buyer, will increase its purchases of non-ferrous metals for stockpiling next year as global prices may drop further in the first half, the head of a state purchasing agency said.

The state-run Public Procurement Service, which stockpiles strategic commodities including aluminum, copper and zinc, plans to buy 160,000 metric tons next year, up 10,000 tons from this year, Chang Soo Man, administrator of the agency, said yesterday in an interview in Seoul.

An index of the metals traded on the London Metal Exchange fell 49 percent this year, with copper slumping 51 percent and zinc dropping 53 percent as a slowing world economy cooled demand. South Korea, Asia’s fourth-biggest economy, relies on imports for 97 percent of its raw material needs.

“Industrial metals in general cannot be free from an impact from falling demand,” said Lee Won Jae, an analyst with SK Securities Co. in Seoul. “They seem to have been oversold, however, especially because of the global financial crisis, and prices may recover later.”

The procurement agency also plans to boost its stockpiles to cover 60 days of domestic demand by 2012 from 24 days now, Chang said, adding it will meet additional costs for new purchases through retained earnings from its operations.

“We are thinking of increasing stockpiles because we may have very low price levels next year,” said Chang, 58. “The first-half is a good time to buy metals.”

Purchase Plan

The service’s purchase plan for next year includes 83,000 tons of aluminum, 39,000 tons of copper, 10,000 tons of zinc and 16,000 tons of rare metals such as manganese, silicon, lithium and tantalum, he said.

“Prices will temporarily bounce back next year because many countries are preparing stimulus measures,” he said. “However, a recession and reduced demand will continue. No one knows how deep the recession will be, so the price rebound will only be limited in scale.”

The Korean economy grew 0.5 percent last quarter from the previous three months, the slowest pace since 2004, as exports fell and consumer spending stagnated. The economy will contract 0.3 percent next year on weaker-than-expected exports, Credit Suisse Group said today.

‘Difficult Time’

“I don’t expect any big increase in Korean demand for metals next year and rather it will be a similar level from this year because of an economic slowdown,” Chang said. “The first- half will be the most difficult time, but I cautiously expect the economy to recover gradually afterwards.”

The procurement agency has 2,000 to 3,000 small and medium- sized companies as customers. The agency stockpiles mostly non- ferrous metals when global prices drop and releases some of the supplies when the market gains. It meets about 8 percent of the country’s metals demand and often sets domestic benchmark prices.

The agency supplies raw materials on 6-month credit terms or on 3-month lease for customers experiencing temporary cash flow problems, and lowered its interest rates to 1.5 percent from 2.5 percent on Nov. 20, Chang said.

“Many small and medium sized companies have weak capacity to cope with difficult situations, and their survival is now in question due to the economic recession,” Chang said.

More companies were likely to rely on national stockpile supplies next year amid the economic slump, with the agency planning to maintain the same release volume of 120,000 tons next year, he said.

South Korea imported 872,065 metric tons of copper products and 1.2 million tons of aluminum ingots in 2007, according to data from the Korea International Trade Association.

To contact the reporters on this story: Sungwoo Park in Seoul at spark47@bloomberg.net; Paul Gordon in Hong Kong on Pgordon6@bloomberg.net;