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Copper prices raise fear bubble has burst

This article is more than 17 years old
· High stocks push costs down to nine-month low
· Worries for 2007 forecasts as other commodities fall

Copper prices sank to a fresh nine-month low last night as investors offloaded the metal on concerns of a slowing US construction market and rising inventories.

After enjoying rampant rises in 2006, copper miners and commodity investors watched prices sink even further yesterday, with a 10% slide in just three days.

Buoyed by its use in car production, building and power grids, copper rose fivefold between 2001 and the end of 2006. The increases made the metal in older 2p coins worth more than 2p and prompted break-ins by copper-hungry thieves at power stations.

The main driver has been the reliance of China and other Asian countries on the metal for their building boom as well as the manufacture of goods for export. But in the last few weeks stocks at London Metal Exchange warehouses have jumped by more than 10,000 tonnes and some analysts are talking of a burst bubble.

Copper for delivery in three months traded at $5,625 (£2,884) a tonne yesterday, the lowest since April. The fall sent shares in miners Antofagasta and Kazakhmys down 3.9% and 4.3% respectively.

Many saw the copper price fall as proof that economic forecasters had mis-called the year ahead. Oil prices also fell sharply yesterday, with London Brent crude below $56 a barrel for the first time since 2005.

Myles Zyblock, strategist at RBC Capital Markets, said: "It's not just about copper - if you look across the commodity complex you are seeing weakness wholesale and what that brings me to conclude is maybe people are reassessing or re-rating the global growth outlook.

"We were very, very optimistic on global growth in 2007 and even modest changes to that outlook could bring sizeable responses in the financial markets and that's probably what we are seeing."

One concern is the impact of cooling demand from US construction sites. Andrew Milligan, head of global strategy at Standard Life Investments, noted that copper inventories had been growing since November while the slowdown in US building continued. "On its own the historical relationship between the US housing market and the copper price would suggest further weakness in the copper market in coming months," he said.

Most analysts and miners, however, point out that the US only accounts for 13% of global copper consumption. While a slowdown there may have some effect, huge demand from China is likely to persist. The rapidly industrialising Asian economy makes up some 20% of global consumption.

Mr Milligan said investors would be anxious to see what happened to copper demand if the Chinese authorities took any action to rebalance their economy.

Another factor affecting commodity prices is the recent appearance of new investors. Alongside pension funds moving into commodities to diversify, there has been interest from speculative investors such as hedge funds. Charles Dumas, at Lombard Street Research, noted that the speculative process had been hiding large copper inventories and he had predicted that copper and base metals were a "bubble about to burst".

"As with all bubbles, 'this time it's different' has given way to a scramble for the exit," he said.

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