Industrial metals fell sharply on Monday in a sell-off in risky assets after a downgrade to the credit rating of the United States intensified fears of a global economic slowdown which could hurt demand for metals. Benchmark three-month copper on the London Metal Exchange slipped to its lowest in 11 weeks at $8,750 before closing at $8,770 from $9,040 on Friday.
Other industrial metals also fell sharply on growing jitters the slowdown in the global economy could turn into a prolonged recession, with zinc and nickel falling to their lowest levels since late November 2010 and tin hitting its lowest since September 2010.
"The focus for investors is on the implications of the current economic downturn and what impact this will have going forward," said Gayle Berry, analyst at Barclays Capital. "There are big questions that need to be answered. Investors can see further weakness (in copper prices) from here." Unease about the US debt rating cut by ratings agency Standard and Poor's sent world stocks tumbling towards 11-month lows on Monday, overshadowing relief that the European Central Bank was buying bonds of strugglers Italy and Spain in a bid to prevent the eurozone debt crisis from spreading.
Stock markets in the United States fell sharply while the dollar rose against a basket of currencies, making base metals expensive for holders of other currencies. Volumes of three-month copper on the LME came close to Friday's level, which was the highest for the year so far, suggesting that its correction continues to lure buying interest. More than 35,000 lots had traded by late afternoon, compared with more than 39,000 lots on Friday.
Some analysts, like Goldman Sachs, are reiterating copper's value at current levels, given its allure as a hard asset during times of monetary expansion, and also its exposure to emerging market growth.
Others said that given questions over global economic growth and the industrial slowdown in the northern hemisphere summer, prices may be entering a protracted soft patch. "I fancy copper and other base metals to weaken over the next month, but don't see a repeat of the H2 2008 collapse," analyst David Thurtell of Citi said. "The copper market is in deficit, and we can expect the Chinese to restock on bouts of price weakness. But the '$11-12K by end 2011' call by other houses is looking increasingly doubtful in the current environment," he added.
Copper tumbled by 7.9 percent last week, in its largest weekly fall since June 2010, bringing losses for the year-to-date to more than 8 percent. The consensus of 40 forecasts in a Reuters poll last month showed the cash copper price would average $9,570 a tonne this year, compared with a January forecast of $9,663 a tonne. Price forecasts in the poll varied from $9,136 to $11,000 a tonne for 2011.Technical analysts at Charles Stanley said charts suggest support for the metal at around $8,700, the bottom-end of a range that has been in place since December 2010, which if fails to hold, could accelerate falls.
"If that ($8,700) level doesn't hold then we should expect a 50 percent retracement of the uptrend that began last summer, with a target of around $8,300," said Bill McNamara, technical analyst at Charles Stanley. The differential between London and Shanghai copper prices, which turned positive last week should encourage Chinese consumers to import metal.
The LME-Shanghai Futures Exchange price differential reached its most favourable levels since August last year. China is the world's biggest consumer of metals, accounting for around 40 percent of refined copper consumption in 2010. Aluminium fell to $2,386 from $2,400 at Friday's close, which was its lowest since late January. Aluminium has been underpinned by expectations power cuts in China will crimp domestic supply and it may have to come back to the international market.
Tin plunged 8 percent to $22,400, its lowest since September 2010, before later cutting losses to close at $22,505 from $24,350. At the start of the year, tin's tight fundamentals suggested it would be a star performer this year, and attracted speculative inflow that is now being forced out. LME zinc closed at $2,091 from $2,200 at Friday's close. Battery material lead slipped to $2,205 from $2,360, and nickel was at $21,250 from $22,505.