International prices for indium, used in LCD screens, hit two-year highs this month as investors on a Chinese exchange for the metal built up stocks, hoping a growing world economy will spur sales of consumer electronics.

However, concern among traders in Europe and the United States that a speculative indium bubble could be forming on the Kunming Fanya Metal Exchange may cap spot prices outside China - at least until commodity houses see a sustained improvement in demand from makers of screens for phones, TVs and computers.

Prices in Yuan in China, which produces 60 % of the annual world indium supply of 670 tonnes and also manufactures many liquid crystal display (LCD) screens, now stand 40 % above those abroad - a disparity partly explained by controls on the Chinese currency and restricted access to the exchange.

Stocks at the Chinese exchange's warehouses are above 1,500 tonnes and prices are at 6020/6060 yuan a kilogram - about $990 - well above the $670/710 seen in the spot market in Europe and a similar level in the United States.

Prices in Europe, up more than 30 percent since May, are nonetheless at their highest since October 2011, driven by a lack of supply as producers take advantage of demand in China.

"In Europe, there is not much material around," said one trader based in Europe. "The Western producers don't have much material and the big Chinese suppliers prefer to sell to Fanya."

Traders put Chinese demand down to speculation on a rise in industrial demand, and to the growing use of indium, along with other metals, as collateral for financial credits in China.

Representatives at the Fanya exchange, which was set up in the southwest of the country in 2011, declined comment.

In the United States, another trader said of U.S. prices: "The market is firm, as supply is tightening."

Collateral

But evidence that the soft, rare metal, hauled from obscurity by the rise of the LCD, is becoming used to underpin a ballooning credit market that Chinese authorities want to hold back has raised concerns about a sudden reverse in prices.

Official efforts to rein in credit growth in China have led to copper, indium and other metals being used increasingly as collateral for unregulated loans.

A second European indium trader said: "The situation in China is going to be temporary as there are no fundamentals driving it. But the thinking among suppliers is, why not get rid of any stock that you have while the going is good?"

He said some industrial buyers were, however, hesitating to lock in longer-term purchases in case prices turn downward, especially given the large tonnages now held in warehouses:

"People are nervous about rolling over long-term contracts," he said. "It makes you worry that if you put on a long-term contract you are putting it on at a time when prices could start to turn."