Copper Slides Toward Market Crash; BHP Sees Rally
2006-06-05 08:11 (New York)
By Chanyaporn Chanjaroen
June 5 (Bloomberg) -- BHP Billiton, the world's biggest
mining company, spends 61 cents to produce a pound of copper and
sells it for $3.15.
The market's largest-ever profit margin is evidence copper
is headed for a record plunge, perhaps as much as 25 percent in
a day, said John Tumazos, the Prudential Equity Group LLP
analyst who made Institutional Investor magazine's quarterly
All-America Research Team 40 times. Copper doubled in the past
year on betting by speculators, the 50-year-old Tumazos said.
After a fivefold increase since 2001 to a record high in
May, copper fell 11 percent in one week, the most ever and a
sign that the rally may be over. The volatility, or rate at
which a price moves up or down, of copper the past 10 weeks is
the highest in history, according to data compiled by Bloomberg.
Prices fluctuated by 48.5 percent in the week ended May 26.
``I've never seen anything quite like this in my entire
life,'' said Leonard Kaplan, 55, president of Prospector Asset
Management in Evanston, Illinois, who's been trading metals for
30 years. The volatility of the 1980s ``was news-related. Now,
you have extreme volatility for no apparent reason at all. The
appetite for risk is greater than these markets can absorb.''
A crash in the copper market -- a 25 percent drop would be
bigger than the 1987 stock-market bust -- would hurt speculators
and producers. A price correction also would provide relief for
users including Tyco International Ltd., the biggest maker of
electronic connectors, and for central bankers concerned about
accelerating inflation.
Copper for delivery in three months on the London Metal
Exchange dropped $70, or 0.9 percent, to $7,800 a metric ton, or
$3.53 a pound, as of 1 pm. London time.
Popular With Funds
Pension funds and hedge funds helped fuel the copper rally
by shifting assets out of stocks and bonds into commodities in
search of greater returns. HSBC Holdings Plc, Europe's largest
bank by market value, said in a May 24 report about $100 billion
will be invested in commodity indexes by the end of 2006,
compared with $10 billion at the end of 2003.
``Expect metal-price volatility to be high with the threat
of a hefty correction to be ever present,'' the HSBC analysts,
led by Paul McTaggart in London, said in the report.
Prices sank as much as 9 percent on May 24. The day before,
copper surged a record 12 percent. While a drop is likely to
hurt earnings at Melbourne-based BHP Billiton and Chile's
Codelco, the world's biggest copper company, producers say the
rally isn't over.
BHP Billiton Unfazed
``We are seeing very good economic conditions around the
world,'' said Charles ``Chip'' Goodyear, the company's chief
executive. ``The supply side is still struggling to keep up.''
Global copper production has been curbed by a strike lasting
more than two months at Grupo Mexico SA and a drop in supply
from Freeport-McMoRan Copper & Gold Inc.'s Grasberg works, the
world's No. 2 copper mine.
A drop in price ``would make our life easier,'' said Bo
Samuelsson, president of Helsingborg, Sweden-based Elektrokoppar
AB, a maker of cable that buys 140,000 tons of copper a year.
Price gains ``increase our credit risk tremendously. Your
customers may have very good credit but one day, prices suddenly
double and change the credit picture.''
Tumazos predicted in August copper would average $2 a pound
this year. Prices have averaged $2.63 on the Comex division of
the New York Mercantile Exchange and reached a record $4.04 a
pound on May 11.
`It's Fairyland'
``It's fairyland,'' said Richard Elman, chief executive
officer of Hong Kong-based Noble Group Ltd. ``We think,
ultimately, prices will come back to reality. The economies are
fairly strong, but it doesn't justify the price for a lot of
these commodities.''
A 25 percent drop would produce a return of about 100
percent for a speculator who is selling New York futures. A sale
of one July contract would result in a profit of about $22,400,
almost twice the exchange-required deposit of $12,150.
``The bull market has reached the stage where you are
seeing very, very high volatility,'' said David Harding of
London-based Winton Capital Management, which invests $5.5
billion in hedge funds. ``That is characteristic of a more
advanced stage in a bull market.''
Price volatility often shows that a market has peaked. In
1998, 10-week volatility for soybeans doubled to 28 percent in
the six weeks before the market declined. Fluctuations in the
price of corn doubled in the weeks ahead of the 2005 and 2004
highs in price. Volatility on the Nasdaq also nearly doubled to
78.41 percent at the time of the April 12, 2000, all-time high,
from 40.59 percent at the start of February that year.
Benchmark for Commodities
Copper, a benchmark for commodities, may be indicating a
decline in other markets. Zinc, which more than doubled in the
past 12 months, climbed to a record $4,000 a ton May 11. The
contract plunged as much as 12 percent four sessions later.
Silver surged 77 percent in the past 12 months, rising to
$15.22 an ounce, the highest in 23 years. It dropped as much as
8.9 percent May 15. Copper has even become a signal for gold
prices. The correlation between gold and three-month copper has
been 0.789 this year, compared with 0.624 in the past 12 months,
according to Bloomberg data. A correlation of 1 would indicate
the two metals are moving in lockstep.
``Copper always seems to be the first one to move,'' said
Jon Bergtheil, head of global metals strategy at JPMorgan Chase
& Co. in London. ``Copper is always the best barometer. It
doesn't seem to be different in this cycle.''
Copper for three-month delivery soared to a record high
$8,800 a ton in London on May 11. The metal has lost 9.5
percent since then on speculation that demand will slow as
rising borrowing costs hurts investment and economic growth.
Interest Rates
The U.S. Federal Reserve on May 10 raised its key interest
rate a 16th time, to 5 percent. The Bank of Canada last week
raised its main rate a quarter percentage point to 4.25 percent,
the highest in almost five years. European Central Bank policy
makers have indicated they will raise rates in June.
``The strong rise in interest rates since the beginning of
the year appears to be causing problems for a growing number of
property markets around the globe,'' said Jochen Hitzfeld, a
commodity strategist at HVB in Munich. ``Slowing growth in the
construction industry will hurt copper demand.''
Global orders for copper will rise 5.2 percent this year,
HSBC forecasts. Growth in China, the world's biggest copper
user, increased consumption for use in everything from bridges
to appliances. The country's economy expanded 10.3 percent in
the first three months of 2006.
``The fundamentals for the global economy still look very
positive and that means in an underlying sense commodity prices
will keep rising, which will buoy the metals markets,'' said Rob
Henderson, chief markets economist at National Australia Bank
Ltd. in Sydney.
Market strategists say that even if demand increases, the
rapid changes in copper prices are a bad sign.
``You're getting these whipsaw moves,'' said Michael Guido,
director of hedge fund marketing and commodity strategy at
Societe Generale in New York. ``It's freaking a lot of people
out.''
--With reporting by Jeff Wilson in Chicago, Pham-Duy Nguyen in
Seattle, Thomas Keene in New York, Damien Ryan in Hong Kong, Tan
Hwee Ann in Melbourne, Thomas Black in Monterrey, Danielle
Rossingh, Julie Tay, Simon Casey, Saijel Kishan and Rishaad
Salamat in London. Editors: Carrigan (tjc/jls/sjc) |
