Copper, nickel and other base metal prices may plunge next year as slower U.S. growth curbs demand and mine supplies increase, Westpac Banking Corp. says.

The spot price of nickel, used to make steel rustproof, could decline 38.5 percent next year while copper, used in wires and pipes, could fall 29.2 percent, the Sydney-based bank said in its quarterly commodities report sent by e-mail today.

The Reuters/Jefferies CRB Index of 19 commodities fell to a five-month low yesterday, and is down more than 10 percent since reaching a record on May 11. The U.S. said yesterday gross domestic product growth slowed to an annual rate of 2.9 percent in the second quarter from 5.6 percent in the first three months.

"The key for us is the downturn in U.S. dwelling activity and the impact of a more cautious U.S. consumer," Westpac's economists including Justin Smirk said. "In 2007, industrial production growth will turn from being a pillar of base metal price inflation to a drag."

Commodities have rallied since 2001, led by demand from China and the U.S. for raw materials to build homes, autos and appliances, and as decades of underinvestment in mines led to supply shortages. Prices also surged as investment funds, helped by low interest rates, bought metals seeking better returns than bonds and stocks.

Metals prices would peak this year and fall "through 2007 as demand growth slows and supply growth gathers momentum," Westpac said. Copper futures in London rose to a record $8,800 a ton in May, and nickel for three-month delivery surged to $29,950 this month, its highest level in at least 19 years.
Falling prices

A survey of brokerages and research companies by Canberra- based Access Economics in July showed analysts expect commodities prices to fall as much as 45 percent over the next two years, due to expanding capacity.

Spot copper prices could average $6,744 a ton this year, before falling to $4,775 in 2007, according to Westpac's forecast. Copper for immediate delivery in London has averaged $6,491.72 this year.

Spot nickel prices could average $22,919 a ton this year, and drop to $14,100 in 2007, the bank said. Nickel has averaged $20,118 so far this year. Aluminium prices could average $2,526 a ton, and then decline to $2,175 next year, Westpac said.

Westpac raised its base metal prices forecasts by an average 6.5 percent for this year due to supply disruptions as companies including BHP Billiton Ltd., the world's largest miner, had to halt production due to strikes.
Inventories

Commodity prices will "broadly track sideways to the end of 2006," Westpac said. Low inventories and supply disruptions caused by strikes mean prices could still spike, it said.

"Given that inventories are expected to remain below critical levels until 2008, base metal prices remain hostage to small movements in inventories for some time," the bank said.

Rising interest rates globally will help to slow raw materials demand, Westpac's report said. The U.S. Federal Reserve raised interest rates 17 times over two years before pausing on Aug. 8. New home sales in the U.S. fell more than expected in July, and the number of unsold houses climbed to a record, according to government data on Aug. 24.

The Bank of Japan raised interest rates in July, the first time it has done so since August 2000. The European Central Bank has raised borrowing costs four times since early December.

Westpac's view doesn't tally with that from Charles "Chip" Goodyear, chief executive officer of BHP, who said Aug. 23 that while the U.S. economy would slow, the impact would not be significant.

"The U.S. is quite a service-based economy, and so there will be a slowdown there and it will have some impact. But again, we expect it to be moderate," Goodyear said. There's "still, a very strong environment, particularly given the supply side."