Tuesday, March 4, 2008

Commodity Prices Plunge a Day After Records for Oil, Gold, Corn

By Millie Munshi


March 4 (Bloomberg) -- Commodities plunged the most in almost six weeks, as oil, gold and corn fell from records on renewed concern that a slowing U.S. economy will curb demand for raw materials.

The UBS Bloomberg Constant Maturity Commodity Index of 26 futures contracts fell 29.4346, or 1.9 percent, to 1,507.877 at 4:02 p.m. in New York. The decline was the biggest since Jan. 23, halting a rally that sent the index up 20 percent this year and to a record high on Feb. 29.

Demand for everything from gasoline to copper to food may slow as inflation accelerates, loan defaults rise and the U.S. housing market deteriorates, said William O'Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. ``Further declines in house prices are likely,'' Federal Reserve Chairman Ben S. Bernanke said today.

``If the U.S. continues to slow, it's not going to bode well for the supply and demand picture of these commodities,'' O'Neill said. ``Every time Bernanke speaks, the negativity about the U.S. economy comes forward.''

Bernanke, in a speech to bankers in Orlando, Florida, urged lenders to forgive portions of mortgages held by homeowners at risk of defaulting. U.S. growth has been stifled, slowing to 0.6 percent in the fourth-quarter, as the subprime mortgage fallout triggered about $181 billion in writedowns and credit losses at the world's largest financial firms.

Dollar, Inflation

Commodities have surged this year, beating gains in stocks and bonds, as a slumping dollar and lower interest rates sparked demand for a hedge against inflation. U.S. consumer prices rose 4.1 percent last year, the fastest pace since 1990. The Fed has cut interest rates five times since September to avoid a recession, and speculators say more reductions are likely.

While the UBS Bloomberg index was setting records almost daily last month, the Standard & Poor's 500 Index has declined almost 10 percent in 2008.

``It's not that these markets are going to start backing up and going down now,'' O'Neill said. ``These things have just been going up and up, and you get to a point where the buying just slows down.''

Oil, gasoline and heating oil fell from records on signs that the Organization of Petroleum Exporting Countries will leave production targets unchanged when ministers meet tomorrow.

Crude-oil futures for April delivery slipped 2.9 percent to $99.52 a barrel on the New York Mercantile Exchange. The price touched $103.95 yesterday, the highest ever.

Gold, Corn, Consumers

Gold fell as lower energy prices eroded the metal's appeal as an inflation hedge. The metal for April delivery dropped 1.8 percent to $966.30 an ounce on the Comex division of the Nymex, after reaching a record $992 yesterday.

Corn fell for the first time in four sessions on speculation that overseas demand and U.S. animal-feed consumption will slow, after prices reached a record $5.7375 a bushel yesterday. Corn futures for May delivery dropped 2.1 percent to $5.545 a bushel on the Chicago Board of Trade. Earlier, the grain dropped as much as 20 cents, the exchange's limit.

Futures also fell today on concern that the commodity rally, driven by demand from investors and speculators, will discourage purchases of raw materials by manufacturers.

Smithfield Foods Inc., the world's largest hog producer, said last month it was reducing its breeding herd by as much as 5 percent because higher corn prices were leading to record feed costs.

Still, commodity prices may continue to climb this year because demand is growing in China and India, traders said.

``As commodities climb higher, there will be jagged movements to the downside,'' said Ralph Preston, a strategist at Heritage West Financial Inc. in San Diego. ``Today's volatility does not represent a reversal in commodity price trends, but simply an opportunity to add to existing positions or establish new ones.''

No comments: