London coffee sets 7-yr peak on stock suspension

London coffee sets 7-yr peak on stock suspension

By Eleanor Wason

LONDON, Aug 22 (Reuters) - World robusta coffee futures closed up on Tuesday but off a fresh seven-year high hit on the back of news on damage to stocks in Italy just as supplies from top producer Vietnam start to run out.

Dealers said weakness in New York pulled the market off the day's peak.

The benchmark November contract closed up $35, or 2.3 percent, to settle at $1,570 after trading between $1,586 and $1,535. Total volume was a strong 23,562 lots.

"We thought New York would be supported by London. It didn't happen and then London came down because of New York," one dealer said.

September coffee settled up over 7 percent at $1,745, the top price for a nearby contract since January 2000. Its premium over November rose to as much as $175.

Euronext.liffe said late on Monday it suspended 3,098 five-tonne lots of coffee stored in the port of Trieste, potentially cutting the amount of robusta available to be delivered against the exchange's futures contracts by as much as 16 percent.

"The catalyst was the announcement by the exchange. It has fanned the -fire and coincides with problems we had already with the drawdown of stocks," a trader said.

Inventories certified by Euronext.liffe stood at 19,428 lots as of mid-August, already the lowest in six years.

Robusta is largely used to make soluble coffee and is already in short supply after a drought-induced drop in Vietnamese production in the 2005/06 season. The better-quality arabica variety trades in New York and mainly grows in Brazil.

Euronext.liffe suspended the coffee because of moisture damage. It had already reduced Trieste's stocks to 3,796 lots after withdrawing 2,021 lots for the same reason earlier this month. The port held the second largest pile of certified coffee after Antwerp, home to two-thirds of the exchange's supply.

VIETNAM HARVEST

Robusta has risen about 32 percent since the start of the year amid fears about Vietnamese production, which accounts for almost a third of world robusta supply, as well as a surge of interest from investment funds.

Traders and analysts declined to predict how much further prices could rise.

"Whenever you get into a situation driven by short-term supply problems, pricing the top of the market is a dangerous business," said Fortis analyst Jonathan Parkman.

Market players agreed prices are likely to remain volatile for the next few months until Vietnam starts to harvest its 2006/07 crop.

The pricing of contracts reflected these concerns with coffee to be delivered in September, November and January all commanding a premium.

Normally, in a well-supplied market contracts further forward are more expensive.

Traders in Germany, Europe's biggest coffee market, said the Trieste stock problems contributed to a virtual standstill in physical robusta trade.

"It came as a rather a surprise," one said. "You do not expect damage on this sort of scale in modern warehousing operations and people are waiting for more information."

Dealers said it was important to find out how much of the coffee would be a total loss and how much could be re-certified.

Longer-term, analysts are divided on the effect higher prices will have on production. Fortis's Parkman said farmers, particularly in Vietnam, are likely to be encouraged to expand output.

German analyst F.O. Licht said in a report last week though that there were few signs of significant expansion.

Producers are likely to be wary of overexpanding after a surge in output, mainly by Vietnam, sent robusta tumbling to 30-year lows of under $400 a tonne in 2001.