Copper Drop Deepens as China Growth, Housing Falter (Update2)

Nov. 17 (Bloomberg) -- Not even $586 billion of emergency spending by China can slow the plunge in copper, the worst- performing metal since the commodities market crashed in July.

Global inventories more than doubled in the past four months as the economic slowdown spread. U.S. auto sales slumped 32 percent in October to the lowest level since January 1991. A report this week may show U.S. builders broke ground on the fewest houses in at least a half century, curbing demand for cables, wires and pipes. China, the world's biggest copper user, is heading for its slowest growth in almost two decades.

``The raw materials sector had come grinding to such a screeching halt that this plan doesn't turn the outlook around immediately,'' Chip Hanlon, who oversees $1.5 billion at Delta Global Advisors in Huntington Beach, California, said of China's stimulus program. ``I'm leery about global growth right now. At the moment, I would still not want to be in base metals.''

Copper is an indicator for the world economy and sets the pace for other industrial metals because an average 400 pounds (181 kilograms) are used in homes and 50 pounds in cars, according to the Copper Development Association. Prices collapsed after rising as high as $8,940 a metric ton on the London Metal Exchange July 2. The International Monetary Fund in Washington said the U.S., Europe and Japan will fall into a recession simultaneously for the first time since World War II.

China is the key to commodity prices because the country is the largest user of iron ore, aluminum, zinc and copper. The nation's economy may grow 7.5 percent or less next year, Morgan Stanley and Credit Suisse Group AG say. That would be the slowest pace since 1990, data compiled by Bloomberg data show.

Chinese Demand

Demand from China helped copper prices more than double in the past six years. Now, the price may fall 37 percent from the Nov. 14 close to $2,400 a metric ton next year, said Andrew Keen, an analyst at Sanford C. Bernstein & Co. in London, the second most-accurate forecaster in the weekly Bloomberg copper survey.

Catherine Virga, an analyst with CPM Group in New York, expects the metal to fall to $2,550 and Adam Rowley, an analyst at Macquarie Group Ltd., forecasts about $3,300. Three-month futures on the LME slumped as much as 3.3 percent today to $3,695, and traded at $3,710 at 2:30 p.m. in Singapore.

Zinc may drop as much as 18 percent to $985 a ton, lead may lose 12 percent to $1,185 and aluminum may slide 7 percent to $1,800, Virga says.

Commodity prices, measured by the Standard & Poor's GSCI Index of 24 raw materials, plunged by more than half from their record on July 3 as the global credit crisis threatened to push the world into a recession, reducing demand. Crude oil has slumped 57 percent in four months.

`A Bubble'

``It was a bubble,'' Stephen Roach, chairman of Morgan Stanley Asia Ltd., said in an interview Nov. 13. The last one was in the early 1970s when ``you had the same type of global growth boom that we've had in the last 4 1/2 years,'' he said. ``The boom has gone to bust. The global economy is growing at 2 to 2.5 percent, less than half the pace we've been running at.''

BHP Billiton Ltd., the world's biggest mining company, has dropped about half in Australian trading from its intraday peak of A$50 ($32) in May as commodity demand slowed and closed today at A$25.10. Rio Tinto Group has tumbled by 53 percent to A$73.44.

Leaders from the biggest developed and emerging nations agreed to further steps at the weekend to prop up the global economy. The Group of 20 cited the potential for more interest- rate cuts and fiscal stimulus. Federal Reserve Chairman Ben S. Bernanke said Nov. 14 central bankers are prepared to take additional action as needed to unfreeze credit markets.

Slowing Output

China faces a ``formidable challenge,'' Mu Hong, a top planning official, said Nov. 14. Export growth and inflation slowed in October. Industrial output grew at the slowest pace in seven years and money supply expanded by the least since 2005.

Steel output in China, producer of a third of world supply, dropped 9.1 in September, the Brussels-based World Steel Association said Oct. 22. Power production fell in October from a year earlier, the first decline since February 2005, the China Securities Journal said Nov. 7.

``We are in a period of very severe production cuts as mid- stream industries such as steel reduce both raw material and product stocks, with massive reverberations through raw material markets,'' Macquarie said Nov. 10.

China pledged ``fast and heavy-handed investment'' in housing and infrastructure through 2010 and a ``relatively loose'' monetary policy in a plan unveiled Nov. 9. The package offered funding for housing, infrastructure, railways, power grids, social welfare and rebuilding. The country plans thousands of kilometers of highways and railroads as it speeds development of the resource-rich western regions.

Seeking the Bottom

``The Chinese are very pragmatic,'' said Richard Elman, chief executive officer of Hong Kong-based Noble Group Ltd., a supplier of iron ore, coffee and grains. ``They will revitalize the economy. We've seen a leveling of steel prices internationally. We're encouraged that the bottom may be here,'' he said in an interview Nov. 11.

More money is being pumped into second-tier cities, Robert Theleen, chairman and co-founder of investment capital firm ChinaVest Ltd., said in a Bloomberg Television interview Oct. 29. As the economy slows, more factories will shut, unemployment will climb and people will return to the countryside.

``Those are the issues that are going to cause indigestion in Beijing,'' he said.

Home Slump

The U.S. housing recession at the heart of the economic decline shows no signs of letting up, signaling copper demand may stay depressed. New-home starts in October dropped to a 780,000 annual pace, the lowest since records began in 1959, economists said. The Commerce Department reports on Nov. 19.

Industrywide U.S. auto sales fell for the 12th straight month in October, extending the longest slide in 17 years and hurting demand for metals. October total sales dropped to 838,156 from 1.23 million, according to Autodata Corp.

General Motors Corp. said this month it may run short of funds before the end of the year and Chrysler LLC said survival would be difficult without aid.