NEW YORK, Sep 22, 2011 (Dow Jones) -- Copper, oil and palladium led the broad sell-off in commodities as fear grows that a sagging economy will have dire consequences for manufacturing, construction and other key parts of the global economy.
Industrial materials were in the forefront of a broader market rout sparked by disappointment with the Federal Reserve's efforts to spur economic growth.
The central bank failed to convince investors it can help prevent a slip back into recession. That coupled with increasing worries about growth overseas sent traders running from anything that will suffer from a decline in business or consumer spending.
"Why would you want to own something you make things out of when nobody is going to be there to buy them?" said Bill O'Grady, chief market strategist at Confluence Investment Management. In a recession, "People will still eat, but they're going to use less oil, less metal," he said.
Copper futures fell by more than 7%, plunging to their lowest levels in a year at $3.48 a pound. Oil settled 6.3% lower at $80.51 a barrel after briefly falling below $80. Platinum and palladium, precious metals closely tied to the auto industry, fell by 4.3% and 6.9%, respectively.
Silver, which has both industrial and investment uses, dropped a staggering 9.6% to $36.538. Meanwhile, gold--usually seen as a safe haven in economic turmoil--fell 3.7% to 1,739.20. Analysts say most of gold's decline came from investors cashing out to cover other losses.
In copper, declines began early in the trading day. Separate reports on manufacturing in China and the euro zone--the two largest users of the industrial metal--showed that sector contracted in September.
The preliminary HSBC China Manufacturing Purchasing Managers Index fell to 49.4 in September from a final reading of 49.9 in August; a reading below 50 indicates contraction. The purchasing managers index for euro-zone manufacturers stood at a two-year low of 48.4 in September, down from 49.0 the previous month.
The outsized decline in copper is a worrying signal for many investors who view the metal as a leading indicator of the economy's health. Copper is found in a wide range of industrial and consumer applications, from wiring and plumbing to cars, trucks and consumer electronics, making it particularly sensitive to the growth outlook.
"Copper is telling you that the odds of a recession are increasing," said Adam Klopfenstein, a senior market strategist with MF Global. "It's hard to paint a positive picture" for the industrial bellwether with the current slate of worries about the global economy, he said.
The benchmark copper contract has slipped by 17% in September.
Companies in the materials sector were hit particularly hard in the selloff. Shares of mining giants Freeport-McMoRan Copper & Gold Inc. (FCX) and Rio Tinto PLC (RIO) both saw near double-digit percentage declines.
The Federal Reserve's gloomy economic outlook and underwhelming stimulus failed to support perceived risk-based assets. Global equities sold off sharply along with commodity markets as traders digested the likely impact of the Fed's actions.
"The Fed has to be the leader," Klopfenstein said. "When the Fed comes out and says the economy has more downside risks, that tells me copper is going to go lower."
Goldman Sachs Thursday lifted some of its copper-price forecasts, saying that the supply-and-demand situation should keep the market supported. The investment bank said it would take a global recession or financial crisis to derail its view that higher prices are ahead.
Meanwhile, gridlock in Washington, worries about a Greek default and now concerns that the Fed is expecting further economic deterioration have all battered oil prices. But data on global demand hasn't shown major declines.
In a research note Thursday, Goldman Sachs said the market is trying to reconcile falling global oil inventories with the threat of future demand declines.
"Global crude oil markets continue to be torn," said Goldman energy analyst David Greely in a note to clients.
Despite falling expectations of global growth, tightening inventories of both copper and crude oil should support prices, Goldman analysts wrote.