Australia's S&P/ASX Index Drops to Almost Two-Year Low on Oil

By Shani Raja

July 3 (Bloomberg) -- Australia's benchmark S&P/ASX 200 Index fell to its lowest since September 2006 on concern record oil prices will dampen global economic growth.

BHP Billiton Ltd., the world's largest mining company, slumped 5.6 percent to its lowest in almost three months, while BlueScope Steel Ltd., the nation's biggest steelmaker, lost 6.8 percent after crude oil rose above $144 a barrel.

The S&P/ASX 200 declined for the fifth straight day, losing 98, or 1.9 percent, to 4,996.8 at 11:22 a.m. local time, the lowest since Sept. 26, 2006.

``The world has definitely turned bearish and sentiment is very negative,'' said Prasad Patkar, who helps manage the equivalent of about $1.8 billion at Platypus Asset Management in Sydney. ``The resources stocks which have held up well so far are being thrown out as probably the last capitulation trade.''

Australia's benchmark has dropped by more than a quarter since its Nov. 1, 2007, record high after the nation's central bank raised interest rates three times to a 12-year high and oil surged, raising costs for producers and denting retail spending.

Higher borrowing costs are weighing on an expansion driven by demand for the nation's iron ore and coal and adding to concern credit-market losses will curb financial earnings.

A measure of consumer discretionary stocks has plunged 42 percent since the S&P/ASX 200's November high, while financials have tumbled 38 percent.

U.S. stocks fell yesterday, sending the Dow Jones Industrial Average into a bear market as steelmakers and coal producers retreated on concern the global economy will slow.

Oil Fears

General Motors Corp., the biggest U.S. automaker, slumped to a 54-year low on Merrill Lynch & Co.'s warning that ``bankruptcy is not impossible.'' That led to the steepest decline in steel shares since 2002 as concern grew that weakness in the auto market will cut demand.

Meanwhile, crude oil rose to a record above $144 a barrel in New York after a U.S. government report showed an unexpected decline in inventories.

``It all boils down to one thing at this time: high oil prices,'' said Patkar. ``The price of oil at this time is choking demand. That's what the world's equity markets are reacting to.''

The following stocks were among the biggest winners and losers on the Australian stock exchange.

Coal producers: Centennial Coal Co. (CEY AU) slumped 68 cents, or 12 percent, to A$5.09, the most since March 20. Macarthur Coal Ltd. (MCC AU) plunged A$1.86, or 11 percent, to A$14.55, the most since June 2004. Coal prices fell as traders speculated that a rally in the past month pushed prices too high. Coal for delivery to Amsterdam, Rotterdam or Antwerp with settlement next year dropped $27.50, or 13 percent, to $190 a metric ton in London, according to ICAP Plc prices supplied to Bloomberg.

Herald Resources Ltd. (HER AU) gained 0.4 percent to A$2.89, the most in more than two weeks. PT Bumi Resources, Indonesia's biggest coal producer, increased its bid for Herald 1.8 percent to A$563 million ($541 million), edging an offer led by PT Aneka Tambang. Bumi will offer A$2.85 cash for every Herald share, up from A$2.80, it said in a statement sent today to the Australian stock exchange.

Insurance Australia Group Ltd. (IAG AU) rose 6 cents, or 1.7 percent, to A$3.67, the highest in more than two weeks. The company may sell its U.K. units to management, the Insurance Times Web site reported, citing an unnamed source within the company. Sydney-based IAG has hired advisers Lexicon Partners to review options for operations including property and casualty units Equity Insurance, Equity Red Star, Hastings and Advantage, the report said.

Just Group Ltd. (JST AU) dropped 2 cents, or 0.7 percent, to A$2.76, the lowest in more than two years. Premier Investments Ltd. may withdraw its A$800 million ($769 million) bid for Just Group after Australia's largest specialty clothing retailer cut its earnings forecast by 10 percent, the Sydney Morning Herald reported, citing billionaire Solomon Lew, who controls Premier.

QBE Insurance Group Ltd. (QBE AU) advanced 60 cents, or 2.9 percent, to A$21.63, the most since June 25. Australia's biggest casualty insurer had its rating raised to ``buy'' from ``hold'' by analysts at Citigroup Inc.

To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net.