Shanghai copper fell by its five percent daily limit on Wednesday and London copper touched a 44-month low, as fears grew that credit-linked defaults in China could unlock copper from financing deals and unleash further selling. Bearish sentiment has swept through the copper market since a bond default by a Chinese solar panel company last week ignited worries about risk in the country's credit market.
A good deal of copper held in China's bonded zones is tied up in financing deals where importers sell copper on domestic markets to raise credit for more lucrative investments elsewhere. Recent selling appears to be driven more by sentiment than a reflection of the actual market in China, traders say, with demand weaker than usual but still reasonable, while the strongest quarter for consumption is about to get underway.
"People are afraid of a knock-on effect to commodities - it's a reflection of how bad sentiment towards China is," said analyst Sijin Cheng of Barclays in Singapore. "But if you're actually talking about facts, or what people are seeing right now, it doesn't point to any unravelling of financing deals," she said. The most-traded June copper contract on the Shanghai Futures Exchange tumbled by 5 percent to 43,740 yuan ($7,100) a tonne, its lowest since July 2009 before paring loses to 44,280 at the end of the first trading session, still down 3.8 percent on the day.
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