Monday, March 17, 2008

Commodities Head for Record Decline on Slowing Growth (Update2)

By Claudia Carpenter and Millie Munshi

March 17 (Bloomberg) -- Crude oil, copper and coffee led a decline in commodities that may be the biggest ever recorded on speculation that a U.S. recession will stall demand for raw materials.

The UBS Bloomberg Constant Maturity Commodity Index fell 4.5 percent to 1,458.597 at 3:56 p.m. in New York, the biggest drop since Oct. 3, 1997, when the data starts. Oil retreated from a record, copper plunged the most in eight weeks and coffee dropped 11 percent. The Reuters/Jefferies CRB Index plunged the most since at least 1956.

Stocks fell around the world after the Federal Reserve cut its discount interest rate at an emergency weekend meeting and Bear Stearns Cos. sold itself to JPMorgan Chase & Co. for a 10th of its market value a week ago. Paul Touradji, founder of the $3.5 billion Touradji Capital Management LP, told clients last week a ``buying orgy'' in commodities had inflated prices.

``Almost all of the commodities are down as people re- examine just how bullish a recession will be for commodities,'' said Eric Wittenauer, an energy analyst at A.G. Edwards & Sons Inc. in St. Louis. ``History has shown that a slowing economy cuts into usage.''

U.S. industrial production declined 0.5 percent last month, the first decrease in four months, the Federal Reserve said today. A separate report showed a measure of manufacturing in New York state fell to the lowest on record in March.

Selling Commodities

``Demand is not going to stay sky high when the economy is tanking,'' said Stu Flerlage, who helps manage more than $600 million at NuWave Investment Corp. in New York.

The CRB Index fell 4.6 percent, the Dow Jones-AIG Commodity Excess Return Index plunged 4.4 percent, and the Standard & Poor's GSCI Index dropped 4.3 percent. Before today, the UBS Bloomberg index had gained 20 percent since the end of December, and the gauge has rallied every year since 2001.

Demand for raw materials has gained as buyers in China used more grains, metals and energy products. Refined copper and alloy imports by China, the world's biggest user of the metal, fell 1.7 percent in the first two months this year, the Beijing- based customs office said today.

Some investors are selling commodities to raise cash to cover losses in equities, Flerlage said.

``A lot of hedge funds have been up to their eyes in commodities this year,'' he said. ``It's been a very speculative play and so now they're getting out of it to cover margin calls and losses.''

Oil Declines

Crude oil for April delivery fell $4.53, or 4.1 percent, to $105.68 a barrel in New York, after earlier reaching a record $111.80.

``Commodity markets do crazy things,'' said Ron Goodis, futures trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. ``Investors have been bidding up the prices of oil like it was a currency on its own. Now they're saying, `I want to take some profits that I've worked for and put it in cash.'''

Copper futures for May delivery dropped 3.7 percent to $3.685 a pound on the Comex division of the Nymex. That's the biggest decline since Jan. 23.

Coffee futures in New York dropped 16.2 cents to $1.36 a pound on ICE Futures U.S., the biggest percentage drop for a most-active contract since July 2000. Raw sugar fell 1.45 cents, or 11 percent, to 12.09 a pound, the biggest decline since April 2002.

Weak Fundamentals

``The fundamentals were never strong enough,'' said Rodrigo Costa, a vice president of institutional sales for Newedge USA, LLC in New York. Global sugar supplies exceeded demand in the year through September by 11.2 million tons, and a surplus of 9.3 million tons is forecast for this year by the London-based International Sugar Organization.

Brazil, the biggest coffee grower, this year will harvest 53.9 million bags, 22 percent more than the government projected in January, Mercon Coffee Corp. of Hoboken, New Jersey, forecast last week. A bag weighs 60 kilograms (132 pounds).

Gold ended the day higher, after paring earlier gains that sent the metal to a record, as losses in equities and the dollar spurred demand for the precious metal as a haven.

``In this sort of environment where people don't know what is going to happen, gold becomes a safe-haven alternative,'' said Robin Bhar, an analyst at UBS AG in London.

Gold Gains

Gold on the Nymex increased $3.10 to $1,002.60 an ounce as the dollar sank to a record against the euro and the lowest in 12 years against the yen. Earlier, the metal touched $1,033.90, the highest ever.

``Gold will be the standout performer,'' said William O'Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. ``It is a financial commodity, so it doesn't have that economic element to it. And in times of uncertainty, people want to have gold.''

The Fed decision to cut the rate on direct loans to commercial banks by 25 basis points to 3.25 percent was aimed at restoring confidence shaken by the collapse of Bear Stearns and more than $195 billion in asset writedowns and credit losses worldwide. JPMorgan agreed to buy Bear Stearns for about $240 million, about 90 percent less than its value last week.

Platinum declined 4.9 percent to $1,973.40 an ounce on the Nymex. Prices of the metal used in jewelry and auto catalysts had climbed to a record $2,286 on March 5 on reduced mine supply from South Africa, the world's biggest producer.

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