Commodity Shares in Bear Market as Oil, Copper Slide

By Eric Martin
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Aug. 5 (Bloomberg) -- Global energy and raw-materials stocks fell into bear markets after plunging oil, gold, copper and wheat prices spurred sell-offs in last year's best-performing industries.

A gauge of energy producers in the MSCI World Index slipped 0.3 percent as of 12:23 p.m. in Hong Kong, bringing its decline from a May record to 21 percent. A measure of mining, farm and chemical companies dropped 1.2 percent, extending its retreat from an all-time high to 22 percent. A bear market is commonly defined as a slump of 20 percent or more.

Refiners such as Nippon Oil Corp. and Valero Energy Corp. led the reversal in energy shares as higher oil costs eroded profits. Slumping sales of houses, cars and airplanes sent copper and aluminum producers BHP Billiton Ltd. and Alcoa Inc. lower. Raw-material prices have fallen as a global economic slowdown threatens to cut demand.

``Commodities prices have hit a choking point,'' said Nader Naeimi, a Sydney-based senior investment strategist at AMP Capital Investors, which manages about $108 billion. ``With further evidence of slowing growth there'll be ongoing pressure on mining and resources stocks.''

MSCI's global energy index gained 28 percent last year while the materials gauged climbed 31 percent as demand from the fastest-growing economies for fuel and building materials outstripped supply.

S&P 500 Energy

Commodity and energy producers have now joined banks, telephone and computer makers, industrial companies and a group of retailers and automakers among MSCI industries in bear markets. Only utilities, household product producers and drugmakers have avoided a 20 percent slump.

Oil and gas companies in the Standard & Poor's 500 Index also entered a bear market yesterday, becoming the sixth of 10 industries in the benchmark index for American equities to do so. U.S. raw-materials producers have lost 18.5 percent.

Manufacturing in China, the world's biggest metals buyer and the fastest-growing of the 20 largest economies, contracted in July for the first time since at least 2005, according to China's Purchasing Managers' Index. The Reuters/Jefferies CRB index of 19 commodities plunged 10 percent last month, the most in 28 years. Drops in cocoa, natural gas and sugar yesterday sent the benchmark to its biggest one-day decline since March.

``The perception that the global economy is slowing is damping demand for commodities,'' said Park Sehick, a fund manager at Hanwha Investment Trust Management Co. in Seoul, which holds $1 billion in equities. Commodity prices ``will keep on falling from here,'' he said.

Nippon Oil

Energy stocks retreated after a doubling in crude from a year earlier helped send the 117-constituent MSCI World/Energy Index to a record on May 21. Hess Corp., the fifth-biggest U.S. oil company, and U.K. explorer Tullow Oil Plc helped lead the advance.

Nippon Oil, the biggest Japanese refiner, has since retreated 21 percent, while Valero, the largest in the U.S., dropped 37 percent as the companies were unable to compensate for crude's rise with higher gasoline and heating and jet fuel prices. The so-called crack spread, or hypothetical profit margin for processing three barrels of crude oil into two barrels of gasoline and one of heating oil, fell 41 percent. Crude fell 18 percent, or more than $25 a barrel, since reaching an intraday record of $147.27 on July 11.

Exxon Mobil Corp., the largest U.S. energy company, dropped 18 percent to $76.60. BP Plc, Europe's second-largest oil company, retreated 20 percent to 518 pence.

BHP Billiton

SBM Offshore NV, the world's largest producer of floating oil-production platforms, had the steepest decline in the energy benchmark since May 21. Shares of the Schiedam, Netherlands-based company dropped 47 percent to 13.90 euros after the company said earnings may decline in 2008 because of high project costs.

MSCI's index of 166 raw-materials producers reached a record on May 19, as gold, copper and wheat rallied to all-time highs.

BHP, the world's largest mining company, dropped 27 percent to A$36 in Sydney since the index peaked. Rio Tinto Group, the world's second-largest iron ore producer, declined 28 percent to A$111.50. Alcoa, the world's third-largest aluminum producer, lost 30 percent to $31.04.

Freeport-McMoRan Copper & Gold Inc. led a retreat in metals producers yesterday, with copper dropping to a six-month low, as rising inventories on the London Metal Exchange and a slowing global economy signaled weaker demand. Freeport, the world's second-largest producer, slid the most in seven years, dropping 12 percent to $80.35. The Phoenix-based miner has lost more than a third of its value since May.

Gold dropped 10 percent from a March 18 record.

``We've seen gold, copper, agricultural and oil prices decline,'' said Walter ``Bucky'' Hellwig, who helps oversee $30 billion at Morgan Asset Management in Birmingham, Alabama. ``The stocks trade with the commodities, and while it's not always a very tight connection, there is a connection.''

To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net.