reality check

Printed in the Fin. Review today:

The price of copper has suffered its biggest one-day fall in 14 years, threatening big losses for global fund managers and speculators who have been loading up on commodity currencies and resource stocks.

The sudden slump in metals prices is being seen by bulls as a much-needed burning off of short-term speculative interest and by bears as a signal that global economic momentum is stalling as oil prices curb activity.

Whatever the implications, the effects were immediate on local markets on Thursday, sending the Australian dollar tumbling and putting the skids on resource stocks on the Australian sharemarket.

"If the globe sees a synchronised downturn next year, then we aren't far from one of those periods where investors should look at temporarily cutting back on the resource sector," said ABN Amro equities strategist Gerard Minack.

Copper futures in London and New York plummeted 11 per cent overnight in a major reversal, prompted by concerns about falling demand out of China. Copper last week had hit 16-year highs in a rally led by speculative investors.

Copper's sudden retreat dragged the rest of the base metal complex lower. Zinc, nickel, lead and tin also were hammered on the London Metal Exchange as hedge funds liquidated positions in a self-sustaining sell-off.

The ferocity of the correction was fuelled further by a lack of liquidity, with many key players away from their desks for the annual LME dinner.

Analysts say some the highly leveraged hedge funds have been burnt by this week's unexpected bounce in the US dollar and are now bailing out of bets on base metal futures to plug losses elsewhere.

But the immediate genesis of the overnight sell-off was a report from the Portugal-based International Copper Study Group showing China's copper consumption fell 21 per cent in July from a year earlier.

The report coincides with growing worries about global economic momentum, with record high oil prices putting a dent in growth expectations for 2005.

"The market is right to be more wary of Chinese demand fluctuations, with less demand momentum in the major industrialised economies," said Greg Gibbs, senior Asian currency strategist with RBC Capital Markets in Sydney.

The base metals boom has been a major influence on the Australian dollar's recent recovery to six-month highs earlier this week to just below US74¢. The currency has since backpedalled to about US72.5¢.

"We don't mind the $A story on interest differentials for a while longer, but we knew that when metals corrected - as they inevitably had to - the dollar would suffer," said Macquarie Bank strategist Joanne Masters.

"What we don't know yet is how messy the metals correction could get, but in the meantime a market that thought the $A was a one-way street is being reminded that currencies inevitably go where the pain is."

Speculators who have loaded up on resource stocks with a view to unfettered gains are receiving a similarly painful reminder. BHP Billiton shares were 3.6 per cent lower on Thursday, while WMC Resources was down 5.1 per cent.

Analysts at Goldman Sachs JBWere who attended BHP's base metals briefing this week noted that the company expects the copper market to remain in deficit this year and next as producers struggle to feed Chinese demand.

"We note, however, comment regarding a turning point for the copper market which may be slightly sooner than the market was anticipating," the broker said in a note to clients on Thursday.

That point looks to have arrived.