Base metals tumble on Wall Street havoc

September 15, 2008 at 4:40 PM EDT

LONDON — Industrial metals tumbled on Monday as investors dumped positions to seek refuge in safer assets after Lehman Brothers filed for bankruptcy, raising worries over the stability of the U.S. financial system.

Adding to Wall Street turmoil, Bank of America announced it would buy Merrill Lynch, American International Group was reported to be seeking help from the Federal Reserve, and the Fed said for the first time it would accept stocks in exchange for cash loans.

Aluminum sank almost 4 per cent to its lowest since the end of January, copper neared its eight-month low of $6,775 (U.S.) per tonne touched on Sept. 10, zinc plummeted 9.3 per cent and nickel fell to its lowest in more than a month.

Copper for delivery in three months on the London Metal Exchange closed at $6,930 per tonne, down $192 or 2.7 per cent from Friday's close. Earlier it hit a low of $6,806.

“Focus will be on the economic environment,” said analyst Gayle Berry at Barclays Capital.

“The prices are very susceptible to potentially more downside in the short term given the current sentiment.”

U.S. industrial output posted its biggest slide in three years last month, data on Monday showed. The weak production figures raised worries over growth in the world's largest economy and over metals demand.

“The market will be looking at the data coming out of the U.S. in much more detail and that is definitely where the metals are going to take their direction from,” Ms. Berry said.

U.S. copper futures for December delivery settled down 5.75 cents, or 1.8 per cent, at $3.1365 a pound on the New York Mercantile Exchange's Comex division.

Both U.S. and European equity markets were sold heavily. The U.S. dollar was hammered before recovering later in the day on mounting risk aversion.

Lack of demand from China, rising stocks and worries over the health of the global economy have depressed metals prices.

Metal markets have been under pressure for a while with copper down more than 20 per cent from its July high of $8,940 a tonne.

Lead shed $90 to $1,850, after falling almost 30 per cent so far this year.

Zinc has lost 25 per cent of its value in 2008, and slipped $123 to $1,762 after hitting a low of $1,710.

In the first seven months of 2008, the International Lead and Zinc Study Group said, the global lead market was in surplus by 23,000 tonnes, while the zinc market was in a 77,000-tonne surplus.

“When markets are teetering on the brink of financial Armageddon, it is hard to make the case for holding practically anything other than cash, and not surprisingly, we are seeing a broad retreat in most commodities,” MF Global analyst Edward Meir said in a note to clients.

“We suspect that the Merrill/Bank of America news, coupled with a likely approval of the AIG loan facility, will go a long way in stabilizing the markets.”

The LME said it had declared U.S. investment bank Lehman Brothers a defaulter and suspended it from trading on its Select electronic trading system.

Traders did not expect a massive impact from unwinding of Lehman's positions as the bank was a recent player in the base metals market.

But the story could be different for Merrill Lynch, which has little presence in the commodities markets.

“If B of A decide they don't want to be in there at all – and they have already made that decision once – then the metals book, which is quite a complicated big book... will take some significant amount of unwinding,” an LME trader said.

Aluminum lost $98 to $2,567 per tonne, after touching an intra-day low of $2,562, its lowest since Jan. 29.

Nickel fell $1,145 or 5.9 per cent to $18,105.

Earlier it hit a low of $17,925, the lowest since Aug.12.

Tin eased to $18,900/18,910 from $19,450.