Metals dive as dollar rally, China fears spurn risk

NEW YORK/LONDON, Nov 16 （Reuters） - Base metal prices posted their largest declines in months on Tuesday, leading a second major wave of liquidation across the commodity markets as deepening euro zone jitters and fears of tighter Chinese fiscal policy sent investors fleeing from risk. Copper slumped more than 5 percent in heavy volume for its biggest one-day loss in six months, while zinc dived by 8 percent, resuming a broad-based sell-off that began on Friday as dealers feared further steps to cool China's asset price rally could

undermine demand in the world's biggest metals consumer. Concerns over an escalating euro zone debt crisis that boosted the dollar deepened the retreat in metals and other commodities,restoring an inverse correlation with the greenback that had waned over the past week.

The Reuters-Jefferies CRB index .CRB fell more than 3 percent and nearly matched Friday's decline as the two sessions represented the index's biggest one-day drops in the past 18

months. Grain markets dived by more than 5 percent while oil and softs fell 3 percent. "Fears on Friday of an interest rate hike that didn't appear are still in the market," said Justin Lennon, an analyst with Mitsui Bussan Commodities. "There is still expectation that China is going to be raising interest rates in the next 10 days or so." On the London Metal Exchange （LME）, benchmark copper CMCU3 crumbled $495, or 5.7 percent, to end at $8,150 a tonne.

Copper has fallen over 9 percent since hitting a record high at $8,966 last Thursday. COMEX copper for December delivery HGZ0 spiraled 19.75 cents, or 5 percent, to settle at $3.7275 per lb. Total volume of over 66,000 lots was more than 50 percent above the 30-day average, preliminary Thomson Reuters data showed. LME aluminum CMAL3 fell over 6 percent to close at its lowest since September at $2,240 a tonne on news of a large 47,000-tonne build in LME-bonded warehouses due to delivery against short futures positions. The latest set of official-sector Chinese inventory sales lent further pressure.

China's State Reserves Bureau, which stockpiled a range of base metals in the first half of 2009, announced a tender for aluminum sales on the heels of similar tenders for zinc and lead.

 Daniel Major, analyst with RBS, said the tender showed China's commitment to keeping a lid on inflation across the spectrum of assets, including metals. "（Interest rate） hikes have the potential to cause sales from private sector （metal） holdings because they raise the opportunity costs of holding nonyielding assets like commodities … while sales into the market should put downwards pressure on pricing." Expectations of an interest rate hike in Beijing ignited a wave of liquidation across commodities late last week after

inflation in the country accelerated to a 25-month high in October. A 4 percent fall in the Shanghai stock market on Tuesday further underscored those concerns.

 "I think what you're seeing is a big pull-back in an extraordinarily bullish market," said Scott Meyers, senior trading analyst with Pioneer Futures in New York. "At this point, the chart does not look too negative, but another 10 cents and it could … the $3.65 （per lb） number is a big number." POWER CUTS Power shortages in China have curbed demand for copper.

In some regions copper processors are operating at only low capacity which has softened otherwise robust demand, Europe's top copper products maker Aurubis said in a note. China said it would impose new guidelines to limit electricity use from next year, extending its energy savings campaign

following a recent drive to reach targets that resulted in power cuts to small industries and smelters. [ID:nTOE6AF03H] Still, potential supply-side shortages continued to offer copper a measure of support. A union workers' strike at Chile's Collahuasi, the world's No. 3 copper mine, went into a 12th day and exacerbated the market's tightening outlook。

 Zinc CMZN3 closed down $199 at $2,139 a tonne, after tumbling more than 10 percent since Thursday. Lead CMPB3 hit its lowest price since October at $2,220.50, before ending down $195 at $2,260. Tin CMSN3 also sank to its lowest level since early October at $24,500 and closed down $1,375 at $24,525.