Metals slip off the pedals of the super-cycle

Metals Evoke Bear Market as Output Gains, Funds Sell (Update1) By Claudia Carpenter and Christopher Donville

While everything from aluminum to zinc has risen at least 25 percent this year and as much as 157 percent, no one is forecasting a continuation of the five- year bull market.

"The cost of taking copper out of the ground is so low, I don't know how we can justify these prices," said Warren Gelman, 73, president of distributor Kataman Metals Inc. in St Louis. "$4 overwhelmed me. $3 copper is way overpriced."

The retreat may be abetted by rising production, a slowing economy and speculators, including hedge funds, who eight months ago began borrowing money to sell copper on the so far- successful assumption they could buy it back at lower prices, according to U.S. government data. Builders began construction of U.S. houses at the slowest pace in six years in October just as global production of copper is poised to increase 4.7 percent in 2007, more than double this year, the International Copper Study Group in Lisbon says.

Even Jim Rogers, chairman of New York-based Beeland Interests Inc., who insists the bull market in commodities will last at least another decade, now says copper prices are "correcting" as a U.S. recession "slows demand for everything."

Rogers, in an interview, said any decline would be a good time to buy because the broader bull market has years to run, led by demand from China, the world's biggest consumer of most metals.

ABN Amro Holding NV metals analyst Nick Moore in London expects a global surplus of 100,000 tons of copper next year, compared with a deficit of 50,000 tons in 2006. The bank forecasts aluminum production will outstrip demand by 150,000 tons in 2007, along with surpluses for lead and zinc.

The price of copper, a leading indicator of the global economy because of its use in everything from water pipes to industrial motors, may be the most vulnerable to a slump. ABN forecasts prices, which reached a record $4.04 a pound in May, will average $2.75 in 2007 and $2.25 in 2008. Copper's last drop of a similar magnitude was in 2001, after the bubble in technology stocks burst.

For the first time since 2001, production of copper next year will surpass orders for wiring and plumbing. BHP Billiton Ltd., the world's biggest mining company, and Codelco of Chile will help ship more than enough of the metal to meet demand.

Metal stockpiles are swelling as mining companies raise production. Spending on exploration this year increased by 47 percent to $7.13 billion, Halifax, Nova Scotia-based Metal Economics said Nov. 8. Joy Global Inc., a maker of mining equipment, today reported record orders for machinery such as shovels, drills and draglines.

Supplies of copper in warehouses monitored by metals exchanges in Shanghai, London and New York rose to a high of 233,220 metric tons last week, compared with 72,773 tons on July 13, 2005.

Metals demand is suffering as the U.S. housing market loses steam. The average U.S. single-family house uses 439 pounds of copper, according to the Copper Development Association in New York. A refrigerator uses almost five pounds of the metal.

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