Those predicting a sharp correction in global equity markets can now point to the recent performance of copper, traditionally the bellwether for the base metals complex. Three-month rolling copper contracts on the London Metals Exchange are now trading at $6,483 (£3,905) a tonne; the lowest level since June 2010 and 14 per cent adrift of copper's five-year average.
As ever, the weakness in pricing has been linked to fears over faltering Chinese industrial demand, although that's only half the story. Exports from the People's Republic dropped by nearly a fifth in February, propelling its balance of trade into deficit for the month. Not only that, but HSBC's Purchasing Managers' Index (PMI) fell to a seven-month low of 48.5, its third straight monthly decline.
There's been much speculation over whether the global copper market is in surplus, but it's probably worth noting that last week's heavy sell-off in the metal coincided with China's first corporate bond default. That's because it's estimated that at least 60 per cent of China's warehoused copper is used as loan collateral. So copper's value is predicated to a significant degree on the level of activity in China's internal loan markets.
The fear is that the loans defaults linked to the bankruptcy of Zhejiang Xingrun Real Estate Co. could simply be the first in a long line of bad credit stories. If Chinese businesses were to start defaulting on their bond obligations, then lenders would invariably start tightening their purse strings, therefore reducing the amount of copper needed for collateral.
