Manufacturing data fuels copper selloff, but some investors still bullish on the metal

Copper prices continued to fall this week, as demand from China falls amid weakening growth in the world's second largest economy.

According to the results of a Bloomberg survey, 12 of 29 analysts polled said copper prices would likely continue to fall next week. Seven of those surveyed were neutral, but experts said there are mounting signs of a bear market. Inventories at bonded warehouses in Shanghai have more than doubled since the fourth quarter, while stockpiles elsewhere in the world hit their highest levels in nearly a decade.

Copper is routinely used in construction projects and manufacturing, serving as a critical component in appliances and other household products. China's voracious appetite for the metal drove prices higher over the past decade, but officials there are now targeting annual economic expansion of less than 8 percent, down significantly from its double-digit growth pace of the past few decades.

Although 7.5 percent annual GDP growth is still exceedingly strong, particularly when compared to the tepid economic conditions in Europe and North America, the drop in output and construction in China could dictate the copper market for the next few years, experts say.

China currently consumes approximately 40 percent of the world's copper, and a drop in demand is having far-reaching repercussions across the globe. Europe, whose sovereign debt crisis has engulfed the continent for more than two years, hampering economic activity, is poised to experience a recession this year, economists say. In March, factory output in both France and Germany – by far the two strongest economies in the euro zone – fell unexpectedly, exacerbating worries that copper prices will continue to decline.

"A slowdown in Europe and China is not good for the long term outlook," DoubleLine Capital asset manager Jeffrey Sherman told Bloomberg. "It feels that we could repeat 2011, where had a good first half and then there was a correction."

If market conditions continue on the same trajectory, they could benefit companies' copper sourcing initiatives. Still, because copper is used so heavily in industrial production and construction, falling demand for the commodity could portend a slowdown in future worldwide economic growth, Sherman said.

On the London Metal Exchange thus far this year, copper has climbed 10 percent to roughly $8,400 per metric ton. Through the first six months of 2011, copper prices remained largely consistent, although they slumped 26 percent in the third quarter, as investors feared contagion would continue to spread across the euro zone, effectively eroding demand for the metal and other commodities.

Copper prices have climbed since the beginning of the year amid hope of a sustained global economic recovery, but Chinese officials have continued to target swiftly rising inflation rates over the past year, enacting policies aimed at slowing the nation's torrid rate of GDP growth in an effort to curb surging food and energy prices. Nonetheless, some analysts and investors are still bullish on the metal, affirming fears are overblown.

"The recent China-related selloff was overdone," Logic Advisors partner William O'Neill said. "I see U.S. and European demand gradually improving."

Bullish copper investors have raised their bets that the price of the metal will rise this year, with hedge funds and asset managers contending the European and U.S. economies will continually improve throughout the end of the year.

On the New York Mercantile Exchange on Friday afternoon, copper futures were up 1.14 percent to trade at $3.81 per pound. The metal reached its highest level in nearly five months on February 9, though it has declined 4.2 percent since then.