Commodities may feel pinch as China slows down

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An unscripted slowdown in China's economy may take an exaggerated toll on commodity markets as demand from its construction sector and export-oriented manufacturers, which drove prices sky high, falls back to earth. As the financial crisis threatens to sink the global economy into recession, the question of China's future demand for oil, coal, copper and iron ore has taken on new importance for traders more accustomed to pricing in unstoppable growth. While no one expects its economy to slip into reverse, some analysts say that even a slower-paced 6%-8% expansion could have an outsized impact on demand for commodities, which China sucked in from around the world to turbo-charge its growth.

“Demand for commodities may slow faster than its GDP for a period, depending on inventory-levels and depth of correction in the Chinese housing market,” said Ben Simpfendorfer, China economist at RBS in Hong Kong. “Anything leveraged to exports will hurt, as will residential housing. So copper may get a double-whammy,” Simpfendorfer said.

London copper has already endured two weeks of unprecedented losses to stand at little more than half-a-record high touched just three months ago, with traders losing faith that the country that consumes more than a fifth of the world’s copper, can maintain its momentum.

A Reuters poll at the end of September found that on average, economists expect China's GDP growth to slow in 2008 to 9.9% from 11.9% in 2007. Other warning indicators are also flashing red: China has halted imports of gasoline, oil companies have delayed new refinery start-ups, steel mills have slowed imports of iron ore and cut production.

Power production, which has normally outpaced economic growth, rose by only 8.9% in September, an official said on Friday, despite expectations of a swift recovery from exceptionally weak summer growth as a coal supply shortage eased and industry resumed after the Olympics. Further clues may come early next week, when China’s customs office releases preliminary data showing September metals trade, although analysts warn that it could still be months before a clear picture emerges after the Olympics.