copper falls to 8 month low on rising supply slow

Copper Falls to 8 Month Low on Rising Supply Slowing Demand

By Millie Munshi

Dec. 20 (Bloomberg) -- Copper tumbled to an eight-month low in New York as rising inventories and slower U.S. growth fueled concern that demand may lag behind mine output.

Inventories monitored by the London Metal Exchange have surged 58 percent in the past two months. The U.S. economy grew 2.2 percent in the third quarter, the slowest pace this year and a sign of reduced demand for metals used in buildings, cars and appliances. Copper prices have dropped 27 percent since reaching a record in May.

``U.S. housing and autos are pushing these accumulating stocks and the market's running out of excuses for higher prices fast,'' said David Threlkeld, president of Resolved Inc. in Scottsdale, Arizona. ``We are going to get a collapse in prices.''

Copper futures for March delivery fell 6.3 cents, or 2.1 percent, to $2.9545 a pound on the Comex division of the New York Mercantile Exchange. That's the lowest closing price since April 20 and the first time the metal has closed under $3 a pound since June. Futures are still up 45 percent this year as labor disputes and mine accidents caused supply disruptions.

The metal has fallen 15 percent since Sept. 30, which would be the biggest quarterly decline since 2002, as the U.S. housing slump deepened. The decline would be the first in ten quarters.

Housing starts in the U.S. reached a six-year low in October when they fell to the slowest pace of the year; November was the second slowest. Builders are the biggest consumers of copper in the form of wire and pipe.

Housing Bubble

``The housing bubble popping means that a major use of copper has been taken out,'' said Michael Smith, owner of T&K Futures and Options Inc. in Port Saint Lucie, Florida. ``Now with the U.S. slowdown, the rest of the world is starting to worry about that spreading.''

Permits for new-home construction fell last month to a nine-year low, pointing to more weakness in coming months.

On the LME, copper for delivery in three months fell $115, or 1.7 percent, to $6,530 a metric ton.

Inventory in warehouses monitored by the LME gained 4,600 tons, or 2.7 percent, to 177,225 tons today. That brought this year's gains to 98 percent and levels to the highest since April 2004.

Stockpiles monitored by London and New York exchanges will gain as much as 33 percent in the first quarter of next year, Credit Suisse Group analysts led by David Gagliano wrote in a report today. Inventories will gain an average of 1,000 tons a day from now until March 31, the bank said.

`Red Flags'

``With supply rebounding and demand remaining soft, we believe dynamics are in place for a prolonged build in exchange- traded inventories that would be sufficient to raise red flags,'' the analysts wrote.

Prices also declined as labor disputes were resolved in Chile, the world's largest copper producer. A union at Xstrata Plc agreed to end a two-day strike at the Altonorte smelter, the country's third-biggest, after management sweetened a wage offer.

Codelco, Chile's state-owned copper company, will probably reach a wage agreement with its largest mine union today and avoid a strike that threatened to halt output at the company's largest source of the metal, said Hector Roco, a director of the mine's Workers' Union No. 1.

Two other unions at the Chuquicamata mine voted yesterday to accept a separate salary proposal. The three unions represent about 89 percent of Codelco's miners at the mine in northern Chile.

`Props' Removed

The negotiations removed the ``labor props'' that had been supporting prices earlier this week, Edward Meir, an analyst at New York-based Man Financial Ltd., wrote in a report today.

Today's drop below $3 broke a ``psychologically important'' barrier, the Credit Suisse analysts said.

The new low may lead to further price declines partly because of technical trading, said Smith, who manages $25 million at T&K.

``When support levels are taken out like this it opens the door for prices to fall,'' he said. ``The supply and demand fundamentals are weak and now you've lost technical support, it wouldn't surprise me to see copper fall back to $2.50'' a pound within the next 60 days, Smith said.

Smith pulled as much as $8 million out of metals contracts within the past few weeks because he said prices will continue to deteriorate.

``There's going to be a lot more to go on the downside before it's at a level where I'd feel comfortable buying again,'' he said.