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Grim BRICs news pushes copper to 5-week lows

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The copper price slumped 1.8% on Tuesday, dropping to a more than 5-week low amid growing fears of a slowdown in China and an emerging market sell-off.

By early afternoon in New York spot copper was changing hands at $3.18 a pound or just above $7,000 a tonne as economic news from China – responsible for 42% of total global copper demand of 20.5 million tonnes – continues to get grimmer.

Chinese markets are closed through Wednesday, but data released over the weekend showed slumping industrial production growth. Prices at the factory gate have now fallen for 15 straight months indicating that chronic industry overcapacity shows no sign of improving and that demand remains weak.

China is targeting 7.5% economic growth this year, slower than recent times but still a robust rate for the world’s second largest economy. However, skepticism about the reliability of GDP measures in China which are open to political manipulation, has shifted attention to other indicators such as electricity consumption or railway volumes.

Numbers out in May showed China’s monthly power consumption growth slowed from 5.5% year on year during the first two months of 2013 to 1.9% in March – the slowest growth rate since May 2009 at the height of the global financial crisis.

The other so-called BRIC nations – Brazil, Russia, India and China – are also struggling.

Commodities powerhouse Brazil grew only 0.6% in the first quarter of this year, Russia’s economy expanded a mere 1.6% in the same period, the slowest clip since 2009, while India’s economy grew 5% in 2012 – the slowest pace for a decade.

The weakness is reflected in the country’s equities which, in contrast to robust US stock markets, are down more than 12% in dollar terms since the start of the year.

On Tuesday iShares MSCI BRIC Index fell more than 2% – its tenth straight day of declines.

Given its widespread use in transportation, manufacturing and construction copper is sensitive to any economic slowdown, but market specific factors are also putting pressure on the price.

Copper has stayed at relatively lofty levels thanks to largely static supply in global markets for a number of years.

Safety-related shutdowns at major US and Indonesian copper producers have cut supply short-term, but a slew of new mines in Indonesia, Peru and Mongolia coming on stream and expansion at existing mines in number one producer Chile this year will result in a big jump in mine output.

Copper is down more than 13% year to date, but remains firmly above the the 18-month lows of $3.06 hit at the outset of May.

The marginal costs of most producers which are in the $6,000 – $7,000 a tonne range or roughly $2.75 – $3.15 a pound.

Given that today’s copper price still represents a healthy margin for producers, prices may well fall further.

London Metal Exchange warehouse stocks – a good indicator of overall demand – have almost tripled since October 2012 and remains above 600,000 tonnes; levels last seen in 2003.

China is and its infrastructure investment-led growth has been a major factor in driving the copper price. In 2003 copper was worth 75 cents a pound.

China’s new leadership is moving away from total centralized control of the economy in an attempt to curb overinvestment in infrastructure.

Now that the impact of market forces have been unleashed, Chinese industry may go through some painful adjustment further dampening demand.