By Millie Munshi
July 31 (Bloomberg) -- Tumbling prices for natural gas, nickel and corn are turning July into the worst month for the Reuters/Jefferies CRB Commodity Index in 28 years.
The CRB Index of 19 commodities slumped 9.7 percent since June 30, the biggest decline since a 10.5 percent drop in March 1980, when the U.S. economy was mired in recession. Natural gas plunged 31 percent to lead July's biggest losers. Corn and nickel slumped 14 percent.
The dollar's rebound from a record low against the euro eroded the appeal of raw materials as an alternative to stocks and bonds, especially for investors who snapped up commodities earlier this year and sent prices to records. Demand also is easing in China, which expanded at the slowest pace since 2005 in the second quarter, Lehman Brothers Holdings Inc. analyst Edward Morse said in a report on July 23.
``This is one of the biggest tests in this cycle because the economic background is so poor,'' said Sean Corrigan, who helps oversee $8.5 billion at Diapason Commodities Management SA in Lausanne, Switzerland. ``Many don't like the fact that they missed the boom, so there's a great deal of rejoicing when there is a big correction.''
Commodities may face ``a very severe correction,'' said Dennis Gartman, an economist at the Gartman Letter in Suffolk, Virginia, who said in June that prices for gold and other commodities may fall. ``The unwillingness of the dollar to hit new lows and the idea of slower demand means it won't be surprising if these markets have further down to go.''
Energy Costs
Higher energy costs, reduced access to credit and a continuing pullback in housing have hobbled the U.S. economy and created ``significant downside risks to the outlook for growth,'' Federal Reserve Chairman Ben S. Bernanke said during congressional testimony July 16 in Washington.
At the same time, the outlook for the dollar and the prospect for rising interest rates hurt demand for commodities as an alternative asset class.
The U.S. currency has rallied 2.9 percent from a record low of $1.6038 per euro on July 15 and may reach $1.50 per euro by the end of the year, according to the median of 36 forecasts in a Bloomberg survey.
``A speculative bubble could be bursting,'' said Stuart Flerlage, who helps manage more than $600 million at NuWave Investment Corp. in New York. ``People had been pouring money into commodities over the last couple years, and especially earlier this year. That might have been the last big push.''
Equities Rebound
Some investors also are putting money back into stocks. The Dow Jones Industrial Average has rebounded from a two-year low on July 15, helped by a decline in oil and a gain in the dollar.
``Some of the momentum has come out of commodities and people seem to rotating into stocks and financials,'' said Evan Smith, who helps manage $1.5 billion at U.S. Global Investors Inc. in San Antonio.
Crude oil tumbled 14 percent from a record $147.27 a barrel on July 11 on signs that energy costs, after doubling in the past three years, were curbing demand. Record prices have ``restrained'' growth in energy consumption, Goldman Sachs Group Inc. analysts said in a report on July 30.
U.S. motorists drove less in May than a year earlier, a seventh consecutive monthly drop, as the pump price of gasoline headed for a record, the Federal Highway Administration reported this week. Retail gasoline has dropped all but one day since reaching a record $4.114 a gallon on July 17, AAA said.
``Weakness in energy prices and a rally in the U.S. stock market'' are reinforcing the idea that air is ``coming out of the commodity bubble,'' Edward Meir, an analyst at M.F. Global Ltd. in Darien, Connecticut, said in a report yesterday.
Rogers' Rally
Still, investor Jim Rogers, who predicted the start of the commodity rally in 1999, said in a July 14 interview from Singapore that the bull-run has a ``long way to go.'' At the time, Rogers, the chairman of Rogers Holdings, advised buying agricultural commodities.
Marc Faber, an investor who publishes the Gloom, Boom & Doom Report and forecast the so-called Black Monday stock-market crash in 1987, said industrial commodities will decline through the rest of the year.
``The world is in recession already,'' Faber said July 23 during an interview from Chicago. ``I put out a negative view for industrial commodities for the second half of 2008 and I stick to this view.''
In China, where record expansion spurred a rally for commodities, growth may slow to 10.1 percent this year and 9.45 percent in 2009, after the economy expanded 11.9 percent in 2007, according to the median of 11 estimates in a Bloomberg survey.
Copper Imports
Chinese imports of copper and alloys plunged 19 percent in June from a year earlier. The metal has dropped 14 percent since reaching a record $4.2605 a pound in New York on May 5 on concern consumption will drop.
Copper, aluminum, nickel, lead and zinc rose on the London Metal Exchange today. Among other commodities, gold, platinum and robusta coffee also advanced. Crude oil was little changed at $126.60 a barrel in after-hours electronic trading on the New York Mercantile Exchange, as of 4:05 a.m. local time.
To contact the reporter on this story: Millie Munshi in New York at mmunshi@bloomberg.net
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