Mining shares retreated for a second straight day after BHP Billiton's credit rating was lowered and concern mounted that supply gluts and waning Chinese demand will keep industrial-metals prices under pressure.
Melbourne-based BHP, the world's largest mining company, slumped as much as 8.5 per cent in London before closing down 6.74 per cent. Standard & Poor's this week reduced BHP's rating to A, the lowest since 2003, to reflect changes in price forecasts and "very challenging market conditions." A gauge of 18 metal producers tracked by Bloomberg Intelligence slid 4.8 per cent on Tuesday, while tin, aluminium, copper and nickel fell in London.
"The velocity of the slowdown in China really caught a lot of people by surprise," Peter Thomas, a senior vice president at Zaner Group LLC, a metals broker in Chicago, said in a telephone interview. "It hit a lot of companies, from the smaller recyclers all the way up to the large ore producers."
Anglo American fell 7.99 per cent in London, Glencore lost 5.5 per cent and Rio Tinto tumbled 4.63 per cent.
Freeport-McMoRan, the biggest publicly traded copper producer, had its credit rating lowered four levels to junk status by Moody's Investors Service last week. Glencore has flagged asset sales and scrapped dividend payouts. Freeport slipped as much as 7.4 per cent in New York on Tuesday
"The tide of downgrades by credit rating agencies in the commodity sector is rising rapidly," Investec said in a report. "Until the tide starts to turn again we cannot assess the damage that will be done to the sector as a whole and to companies individually."
Copper for delivery in three months slid 0.2 per cent to $US4551 a metric ton ($US2.06 a pound) at 4.40pm on the London Metal Exchange. Nickel fell as much as 1.1 per cent to a two-week low.
In New York, copper futures for delivery in March fell 0.1 per cent to $US2.052 a pound on the Comex.
"The overall picture for copper is bearish," said Barclays' commodities analyst Dane Davis. "The (approaching) Chinese holiday means the entire country shuts down. I would caution against interpreting price swings in February as we really don't know what's going on with the fundamentals."
Copper demand growth slowed to around 2 per cent last year in China, which accounted for nearly half of global consumption estimated at around 22 million tonnes. This year is unlikely to see much of an improvement, analysts say. China's manufacturing activity contracted at its fastest pace in almost three-and-a-half years in January, an official survey showed, suggesting growth is off to a weak start in 2016.
Three-month aluminium lost 1.3 per cent to $US1501.
Zinc closed up 1.6 per cent at $US1674. It earlier touched a two-month high of $US1685.50 as the market factored in tighter supplies. Zinc prices are up more than 15 per cent since January 12. News that a large US zinc producer Horsehead Holding had filed for Chapter 11 bankruptcy helped boost sentiment.
With Standard & Poor's and Moody's Investors Service both contemplating downgrades of BHP, analysts are debating how much the Melbourne-based metals and energy producer needs to cut payouts to shareholders when it reports half-year financial results on February 23. Pressure is growing for BHP to abandon its progressive dividend policy, reassess capital spending and even consider a share sale.
"S&P has put their cards on the table, and it's a matter of who is going to blink first," said Scott Rundell, chief credit strategist at Commonwealth Bank of Australia in Sydney. The action effectively means "a downgrade has already been flagged to the company, and the company then has the opportunity to come up with a solution to prevent that downgrade", he said by phone.
The cost of protecting BHP bonds with credit-default swaps climbed to an almost seven-year high of 270 basis points last month and was at 231 basis points on Monday, according to prices from data provider CMA.
The yield premium on BHP's $1 billion of March 2020 bonds over the swap rate widened to 187 basis points as of 7pm on Tuesday in Sydney, based on CBA prices. The difference was 87 basis points when the securities were sold in March 2015. Investors holding the debt have lost 0.5 per cent in the past three months, based on the Bloomberg AusBond Credit Index.
Holders of BHP's US dollar-denominated bonds have lost 9.5 per cent in the 12 months through February 1, Bank of America Merrill Lynch index data show.