By Claudia Carpenter and Millie Munshi (Bloomberg)

Copper may drop for the first time in seven years as the U.S. slips toward recession and the Chinese government reins in the world's fastest-growing economy.

The worst housing slump since 1980 will reduce sales of pipes and wires in the U.S., while shipments to China will slow as officials raise interest rates and finish construction for the summer Olympics, said David Threlkeld, president of Resolved Inc. in Scottsdale, Arizona. At the same time, Chile and the Democratic Republic of Congo will increase supply, the International Copper Study Group forecasts.

"I'm amazed the copper price is where it is,'' said Threlkeld, the trader who correctly predicted in May that prices had peaked for the year. "There isn't the physical demand out there to justify these prices. When the market starts to unravel, nobody will want to own copper.''

Copper fell in each of the past three U.S. recessions, and prices may drop about 4 percent by the end of this year, according to BNP Paribas SA, France's largest bank. A decline threatens to reduce profit at the three largest publicly traded copper producers, Freeport-McMoRan Copper & Gold Inc., BHP Billiton Ltd. and Xstrata Plc, said Goldman Sachs Group Inc. Shares of each have appreciated on average at least 39 percent a year since 2003.

"We will be taking money off the table,'' said Sean Corrigan, the Lausanne, Switzerland-based chief investment strategist at Diapason Commodities Management SA, which manages $7 billion. Corrigan said the company is likely to start selling base metals short, betting that prices will decline and he can buy them back later at lower prices.

2008's Fast Start

Copper on the London Metal Exchange gained 11 percent to $7,400 a metric ton in the first two weeks of this year, its best start in more than two decades. The metal for delivery in three months dropped $281, or 3.9 percent, to $6,860 a ton as of 5 p.m. in London, the biggest decline since Nov. 21. Prices have risen every year since 2001, reaching a record $8,800 on May 11, 2006.

The copper study group is predicting supply will exceed demand by 249,000 tons this year, the most since 2001. Mine output in Chile, Mexico, Zambia, Congo and Peru will rise after record prices led to more investment, the Lisbon-based group said.

Some of the biggest securities firms, including Merrill Lynch & Co., Morgan Stanley, Goldman Sachs and Nomura Securities International Inc., are predicting a recession in the U.S. in 2008. Lehman Brothers Holdings Inc. says growth in China will slow to 9.8 percent, the smallest rate of expansion since 2002, after the government raised interest rates six times in a year and restricted lending.

Japan Housing Slows

Japan, the world's second-largest economy, has a 50 percent risk of recession this year, according to New York-based Goldman. Insolvencies in the construction industry there rose to a four- year high in 2007 after stricter building-permit rules spurred a four-decade low in housing starts, according to Tokyo Shoko Research Ltd.

"Slower growth in the U.S. and Europe and Japan, and the fact that China is also tightening up monetary policy, will mean there's no strong impetus for demand coming from anywhere,'' said David Thurtell, a metals analyst at BNP Paribas in London. "In that kind of environment, unless you get supply disruptions, there's no way prices can sustain their average of 2007.''

Headwind for Prices

In the U.S., new foreclosures climbed to a record in the third quarter, and the number of Americans who fell behind on their mortgage payments rose to a 20-year high, the Mortgage Bankers Association said last month. Contractors broke ground on 25 percent fewer houses last year, the biggest annual decline since 1980, according to the Commerce Department. Building accounts for almost half of copper use worldwide.

"If the U.S. goes into a recession, that is going to be a headwind for industrial metals,'' said Brian Hicks, who helps manage $1.5 billion at U.S. Global Investors Inc. in San Antonio. ``We could see a lot of pressure on the copper price and the other metals.''

The Chilean Copper Commission, representing the biggest copper-producing nation, said Jan. 9 that purchases of refined copper will slide 1.5 percent in the U.S., as the growth rate in Chinese demand slows to 6 percent. Catherine M. Virga, a metals analyst at New York commodity researcher CPM Group, said China used 14.3 percent more copper in the first 10 months of 2007 than during the same period in 2006.

Fed May Cut Rates

At London-based Barclays Capital, analysts say China is the reason not to get bleak about copper. The world's most populous nation swapped places with the U.S. as the biggest copper consumer in 2002 and now accounts for 27 percent of world demand, compared with 12 percent for the U.S., according to CPM. More than half the growth between 2002 and 2007 was because of China alone, according to New York-based Lehman.

Goldman said Jan. 11 that prices, down 19 percent from their record, already reflect the slower U.S. housing market, and some analysts expect the Federal Reserve will help stave off a recession. The Fed, which has lowered borrowing costs 1 percentage point to 4.25 percent since September, will cut at least half a percentage point more this month, according to the median forecast of 59 economists surveyed by Bloomberg.

"We've injected trillions of dollars of liquidity into the market and that's bullish for metals,'' said John Tumazos, founder of Very Independent Research LLC in Holmdel, New Jersey. "Metal markets look better than they did six months ago.''

Finding Alternatives

Nevertheless, copper prices are high enough that consumers are finding alternative materials such as plastic for water pipes, according to Huntsville, Alabama-based Wolverine Tube Inc., which closed its U.S. plumbing unit after posting 11 losses in 13 quarters. Builders are the biggest users of the metal in the U.S., putting about 400 pounds in the average home.

"Tube mills are shutting down,'' said Jay Richman, who owns wholesale plumbing supplier E.W. Berger & Brother Inc. in Weehawken, New Jersey. "It just shows you that people aren't using copper anymore.''

Dearborn, Michigan-based Ford Motor Co., the second-biggest U.S. automaker, said last month it will reduce first-quarter production by 7.4 percent because of slowing sales. The average car uses more than 50 pounds of copper, the Copper Development Association estimates.

In Europe, industrial production fell in November, prompting the Royal Bank of Scotland Plc to declare that manufacturing is in its first recession since 2001. The European Central Bank in December said the region's economy will grow 2 percent this year, down from 2.6 percent in 2007.

Inventories Expanding

"Industrial metals are the biggest concern,'' said Chip Hanlon, president of the $1.2 billion Delta Global Advisors Inc. fund in Huntington Beach, California. "As the recession mounts, we could see those prices falling.''

Slowing U.S. sales have allowed inventories to build. Warehouses monitored by exchanges in London, Shanghai and New York held 220,206 tons, equal to about 4.5 days of global demand, Bloomberg data show. Inventories have jumped 18 percent from 186,032 tons at the end of March 2006, or 3.8 days of demand, as the copper price on the London Metal Exchange headed toward a record high.

A surplus in global production may last through 2012, forecasts Dan Smith, a metals analyst at Standard Chartered Plc in London.

"As much as people say it's going to be different this time around, I am not convinced'' that copper can avoid falling during a U.S. recession, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. ``There's the risk that these prices will be sharply lower and fall much more than what people are expecting.''