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Copper Goes From First to Worst as Economies Slow
Sept. 29 (Bloomberg) -- Copper, the best-performing industrial metal in 2007, may end this year as a loser for the first time since 2001.
The metal, used for electrical wire and water pipes, may drop 11 percent to $2.75 a pound in New York by Dec. 31 as demand from the housing industry declines, said Michael Pento, who helps oversee $1.5 billion at Delta Global Advisors in Holmdel, New Jersey. Copper gained about 30 percent annually on average for the past six years as mines from Chile to Australia struggled to keep pace with consumption in Asia.
Builders use about 400 pounds of copper in a typical U.S. home, so prices may fall more than other industrial metals because the housing market is collapsing. Sales of new U.S. homes fell to a 17-year low last month, the Commerce Department said Sept. 25. Copper dropped 3.2 percent to $3.0745 a pound on the Comex division of the New York Mercantile Exchange last week, making it the biggest loser on the Reuters/Jefferies CRB Index of 19 commodities for the first time since December.
``People realize that our worst fears about the economy are true, and there's going to be very little demand'' for copper, said William O'Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. ``For gold, and other commodities, people are focusing on this `flight to a safe haven' idea in our financial crisis.''
Copper Turnaround
Copper rallied 26 percent in the first quarter, more than any other metal on the CRB index, and reached a record $4.2605 on May 5. The price fell 32 percent since then as U.S. growth faltered and prospects for a rebound were eroded by the failure of banks saddled with subprime mortgage loans. Copper will average $3.28 next year, $2.875 in 2010 and continue its slide through 2012, according to 12 analysts surveyed by Bloomberg.
Copper futures for December delivery plunged 5.5 percent to $2.9065 today in New York, the first time the metal has fallen below $3 this year. The metal is down 14 percent in September, poised for its worst month since June 1996, and is headed for its biggest quarterly decline ever.
Aluminum fell 2 percent to $2,441 a metric ton on the London Metal Exchange, while zinc slid 4.4 percent to $1,692 a ton. Platinum declined 2.9 percent to $1,090 an ounce in London over-the-counter trading.
Economists expect U.S. growth to slow to 1.5 percent next year from 1.7 percent in 2008, according to surveys compiled by Bloomberg.
Financial Bailout
Government proposals to rescue financial institutions helped gold, not copper. Treasury Secretary Henry Paulson introduced a $700 billion bailout plan on Sept. 19, seeking to revive credit markets through the government purchase of troubled financial assets. The U.S. House of Representatives today voted down the proposal backed by the Bush administration and congressional leaders of both parties.
Gold gained 20 percent since Sept. 11, including a 0.7 percent gain today, as investors sought alternatives to equities and bet the bank rescue will both increase government borrowing and inflation. Economists estimate consumer prices will rise 4.5 percent this year, the fastest since 1990.
The price of gold gained 2.8 percent last week to $888.50 an ounce, and silver surged 8.2 percent to $13.503 an ounce.
``The fact that we need a bailout is pretty indicative of the fact that the economy isn't sound,'' said Pento, who correctly forecast rallies in gold and oil after Paulson made his proposal. ``Base metals are not my favorite play. I'm using this opportunity to accumulate precious metals and energy.''
Metals Outlook
Philip Roberts, the chief European technical strategist at Barclays Capital in London, said copper may drop 11 percent on the London Metal Exchange to $6,000 a metric ton ($2.72 a pound) by the end of the year, and gold may top $1,000 in the next month or two. Logic Advisor's O'Neill forecast copper at $2.90 a pound in the next two months.
As copper fell last week and the MSCI World Index of stocks dropped 2.8 percent, the CRB rose 1.4 percent, the first gain since Aug. 22, led by sugar, crude oil, cocoa and soybeans.
Copper last had an annual decline in 2001, when a U.S. recession cut demand from manufacturers and stockpiles monitored by the LME were heading to a record high. LME inventories jumped 81 percent since the start of May and reached a 19-month high of 209,800 tons on Sept. 19.
The government's attempt to cleanse banks of bad mortgages won't stem the slide in home prices, said Robert Toll, chief executive officer of Toll Brothers Inc., the world's largest luxury homebuilder.
Toll reported its fourth straight quarterly loss this month as builders grappled with the worst housing decline since the Great Depression. While new construction stalled, sales are falling even faster, leaving 10.9 months of supply compared with 10.3 months in July, government data show.
Rescue, Revival
Not everyone expects copper to drop.
Tim Mercer, the chief investment officer at Hong Kong-based hedge fund Musashi Capital Ltd., said the rescue plan may revive copper along with other commodities because the government's cash infusion is ``potentially enormously inflationary.''
Investors buy raw materials as a hedge when the dollar weakens and inflation increases, Mercer said. The CRB index surged to its highest ever on July 3 as the U.S. currency sank toward a record low against the euro. When the dollar rebounded 12 percent in the next 10 weeks, the CRB dropped 25 percent.
Paulson's plan also may help copper by freeing up credit markets and setting the stage for a revival of investment and economic growth, said Donald Selkin, chief market strategist at National Securities Corp. in New York.
Gold Versus Copper
``If they do what they say they're going to do, and we don't have this credit issue hanging over everyone's head, that means business can expand,'' Selkin said. ``No, it won't put a bottom in for housing, but it could stabilize commercial demand for copper.'' Gold is still a ``better bet'' than copper, he said.
Gold will gain as the bailout plan weakens the dollar and fuels inflation, said Brian Hicks, who helps manage $1.5 billion at U.S. Global Investors in San Antonio. The U.S. Dollar Index has dropped 1.4 percent since Sept. 18, the day before Paulson introduced the plan.
``If I had to allocate new money, it would be more on the gold front and not toward any of the base metals,'' Hicks said. ``We've seen copper demand come down, and that will probably continue. Some of the reasons to be bearish on copper are the reasons to like gold. We're at a point where gold will outperform.''
To contact the reporter on this story: Millie Munshi in New York at
mmunshi@bloomberg.net .
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