Copper prices have fallen sharply last week on the London Metal Exchange, falling to their lowest level in more than three and a half years with investors worried about the current state of the Chinese economy.
Fears that have weighed more heavily on all industrial metals and base metals as China is the world’s largest consumer of these commodities and came to dominate copper demand over the past decade, consuming five times as much as No. 2 user the US
Analysts fear that the Chinese economy is facing a significant downturn as the government is trying to rein in rising credit, lower overcapacity and protect the environment from industrial pollution while moving to a more consumption-based growth model.
Already 2 weeks ago, weakness in copper occurred exactly in line with China‘s first default on a domestic bond (Chaori Solar). While the company was small, the concern was that the default could set off a domino effect, with lenders pulling back and corporate borrowers unable to roll over their considerable debts.
Then, there were reports that another Chinese company electrical equipment maker and solar panel manufacturer, Baoding Tianwei Baobian Electric, saw its bonds and stocks suspended from trading after reporting losses for a second year running.
Investors are also worried after seeing China‘s exports unexpectedly falling 18.1 percent in February to 114.1 billion dollars, while imports rose 10.1 percent to 137.08 billion. Analysts expected a 6.8 percent increase in exports and a 8 percent rise in imports, resulting in a 14.5 billion dollar trade surplus.
Similarly, even if Chinese industrial production increased 8.6% in January and February compared with the same period of 2013, it is its weakest pace for 5 years which suggests a lasting economic slowdown.
Also, while copper was previously used as collateral for loans in China, as its value decreases, concerned borrowers were forced to repay their loans and banks are reluctant to grant new loans under such conditions.
“In general, copper had been a good barometer for the global economy, but in the last decade or so, with China reaching this ascendancy in terms of being the mecca of copper, the China story matters much more,” John Stephenson from First Asset Investment Management Inc. in Toronto, said in a telephone interview. “With all due respect to copper, it’s probably lost its right to be considered a Ph.D. in economics from a forecasting perspective.”