Copper price meltdown continues on Chinese economic shocks

In lunchtime trade in New York trade May copper changed hands at just below $2.92 a pound, down 1.5% to the lowest level for the most active futures contract since June 2010.

A steady stream of dismal economic numbers out of China – responsible for 42% of total global copper demand – have pushed the price of the red metal down more than 9% since just this Friday.

Data released by China's Statistics Bureau this morning shows industrial production, fixed asset investment and retail sales data for January and February – combined in order to reduce the seasonal effect of Chinese New Year – all coming in way below expectations.

Year-on-year industrial production growth dropped from 9.7% in December to 8.6% in January and February and came in almost full percentage point below consensus forecast.

Signs that Chinese authorities are doing everything they can to throttle back debt-fueled growth and rein in lumbering state-owned enterprises are evident from an almost halving in the growth achieved by the state sector to 4.4%.

Investment growth – the engine of China's economic growth for decades – was pegged at 17.9%, down from 19.6% and versus forecasts of 19.4% expansion after property sales and new construction contracted.

What must be particularly worrying for China's new leadership, which is attempting to transform China from an investment-driven to a consumption-led the economy, is that retail sales growth also declined.

Consumer spending dropped from 13.6% to 11.8% despite the recent strength in income growth.

Today's weak data comes on the heels of weekend figures showing Chinese overall exports slid a stunning 18.1% year-on-year and imports of copper fell 30% in February from the month before.

As for the Chinese government stepping in to stimulate the economy should the slowdown turn into a crash, the news on that front is not great either.

China recorded its first corporate bond default last week when a solar company Shanghai Chaori went belly-up, sending shock-waves through industry.

In a press conference this morning at the conclusion of the National People's Congress, Chinese Premier Li Keqiang warned that more defaults will be allowed and that economy faces "severe challenges.":

Li noted that the biggest challenge was the increased downward pressure on China's economic growth, acknowledging "very limited space for maneuver in carrying out fiscal and monetary policy" and face "multiple tough choices in exercising macro-control."

Given its widespread use in transportation, manufacturing and construction, the metal is often referred to as Dr Copper and price trends used to prognosticate on the health of an economy.

But the current slump in the market for copper has been exacerbated by distortions in the Chinese market for copper where the red metal is often used as collateral for loans.

Estimates put the portion of warehoused copper in China used for financing at as much as 60%.

The worsening credit situation in the country could see the copper market enter a vicious circle.

Borrowers, forced by their bankers to repay loans will have to sell the metal into an already well supplied market and in the process push down market prices even further.

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