The price of copper is in freefall, dropping below $3 (U.S.) per pound for the first time in 14 months on Monday, signalling a loss of investor confidence that China's appetite for commodities is strong enough to prevent another global recession.
Copper, an economic bellwether because of its widespread use in construction and manufacturing activities, has fallen 35 per cent from its record $4.60 just seven months ago, as global markets continued to slide amid concerns of unmanageable debt loads in the U.S. and Europe and slowing growth in China.
In the past three weeks alone, copper has plummeted 25 per cent as investors become increasingly nervous that China, the world's largest consumer of the metal, won't step in and buy with the same vigour that it did during the last recession.
"There is an overarching concern about what the global economy may do, and of course that includes the developing world and countries like China," Bart Melek, head of commodity strategy at TD Securities, said in an interview on Monday.
"There is a risk out there that China might be slowing more than we think."
Copper fell 5 per cent to $2.99 on Monday, before bouncing back to close at $3.15 a pound on the Comex division of the New York Mercantile Exchange.
The volatility is driving analysts to downgrade their copper forecasts as the Chinese economy gears down from double-digit growth over the past three decades, and its slowing real estate and auto sectors are expected to further dent growth.
Morgan Stanley cut its 2012 copper price forecast by 17 per cent to $3.80 this week, citing "diminishing prospects of robust global growth" and increased risk of a recession in developed countries.
"Global financial and commodity markets have moved from a state of heightened to extreme risk aversion," Morgan Stanley analysts said in a note.
"Driving this is the increased risk that the sum of all market fears will eventuate a renewed recession in the U.S. and Europe, greater global financial uncertainty because of a worsening debt crisis in Europe with attendant pressure on banks, and a hard landing in China."
Some analysts see the economic turbulence in China as a short-term issue, and expect the economy to grow at a steady pace and it continues to expand its infrastructure based. But the worry remains that the volume of commodities it buys could be curbed, particularly when compared to the last recession when growth was fuelled by a $570-billion economic stimulus package from Beijing.
"China funded our recovery in the commodity world ... We don't believe it can step in and give the commodity markets the recovery it saw in 2008," Paul Robinson of metals consultancy CRU told a London Metal Exchange conference on Monday.
"(China is) overall positive but not fantastically positive ... Chinese growth rates remain healthy but at lower rates."
With a file from Reuters