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Commodities sink as Japan crisis sparks risk aversion

Smoke billows from burning oil refinery following a massive tsunami triggered by March 11 earthquake, in Tagajo, near Sendai, northern Japan, Sunday, March 13, 2011.

Junji Kurokawa/Junji Kurokawa/AP

Raw materials fell on Tuesday as key markets ignored fundamentals to falter under a wave of risk aversion with Japan's deepening nuclear crisis, sending crude oil down by more than 4 per cent.

Even gold prices lost some lustre as investors cashed in on record highs to cover margin calls on their equity holdings.

Japan raced to avoid catastrophe after a quake-crippled nuclear power plant exploded and sent low levels of radiation floating toward Tokyo.

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Prime Minister Naoto Kan urged people within 30 kilometres of the facility north of Tokyo to remain indoors, underscoring a dramatic worsening of the crisis, the world's most serious since the Chernobyl disaster in Ukraine in 1986.

"People are going for risk aversion, so investors are liquidating assets and positions including in crude oil and gold," said Tetsu Emori, a fund manager at Tokyo-based Astmax Co Ltd.

"This is just the first reaction after Fukushima, so it's more about sentiment."

The worsening backdrop wiped some $620-billion (U.S.) off Japanese stocks in two days, while Europe's FTSEurofirst 250 index shed some 2.6 per cent in early trade.

Oil was hit hardest, driven by sentiment rather than the supply-demand dynamics, analysts said.

"It's not really fundamental concerns that Japan, one of the largest oil consumers, will be missing over the next few months," said Commerzbank analyst Eugen Weinberg.

"It's more sentiment that is depressing the prices of risk assets such as equities and commodities," he added.

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Brent crude fell below $110 a barrel for the first time in nearly three weeks. April Brent was down 4.3 per cent at $108.70 a barrel after trading as low as $107.88. U.S. crude for April dropped 3.9 per cent to $97.26.

Oil markets were also tracking developments in the Middle East, where Saudi Arabia sent troops into Bahrain on Monday to help calm weeks of protests by the Shiite Muslim majority, a move opponents of the Sunni ruling family on the island state called a declaration of war.


Gold shed 2 per cent, dipping below $1,400 an ounce, as declines in stock markets forced speculators to sell bullion to cover losses.

Some of the losses stemmed from falling Japanese stocks, which plunged more than 14 per cent, heading for their biggest drop since 1987 as concerns grew over the economic effect of the unfolding disaster.

UBS strategist Edel Tully said in a note that gold was not in danger of losing its traditional safe-haven status, with the market likely to reassert itself.

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"We argue that it's not unusual for gold to tumble during initial episodes of a severe broad asset sell-off. Investors sometimes have little choice but to sell the yellow metal to cover margin calls and losses elsewhere before gold then divorces itself from the downtrend."


In industrial metals, benchmark three-month copper futures on the London Metal Exchange reversed early gains to fall 2.3 per cent to $8,976.25 a tonne.

"Looking at it from a market psychology point of view, you have headwinds in the form of heightened unrest in the Middle East and the uncertainty surrounding the implications of economic demands from the earthquake and tsunami," said Barclays Capital metals analyst Gayle Berry.

"But from a fundamental perspective, I think things are still shaping up nicely. You have this improvement in demand bubbling behind big headlines, but very short-term prices will remain dominated by the large number of uncertainties that are out there."

In bulk commodities, Japanese steel mills are diverting metallurgical coal cargoes due to plant outages. Iron ore and thermal coal may also need to be sent elsewhere after damage to ports and production facilities, possibly to South Korea and China.

Grains futures also slid. Japan is the world's biggest importer of corn and third-largest buyer of soybeans, the main ingredients in animal feed. It is also the world's fourth-biggest wheat importer, and plans to buy 4.96 million tonnes of milling wheat in the year to March 31.

But losses were seen reversing as they were not fundamentally supported with tight global grain supply.

"Generally, the market will remain volatile given the situation in the Middle East, North Africa as well as Japan. But there is potential to see buying on the dips, especially in corn and soy, where the balance looks like it will be tight at the end of the season," said Victor Thianpiriya, agricultural commodity analyst at ANZ in Melbourne.

With files from Rujun Shen, Lewa Pardomuan, Amanda Cooper, Nia Williams and Susan Thomas.

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