China’s growth forecast chills commodity markets – by Richard Blackwell and Nicolas Johnson (Globe and Mail – March 6, 2012)

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The prospect of slower growth in China threw a scare into commodity markets on Monday, raising worries about the sustainability of Asia’s voracious demand for a host of natural resources.

Commodity prices slumped and stocks in the sector retreated sharply after China lowered its gross domestic product growth target for the year to 7.5 per cent from 8, extending a trend of slowing expansion. Last year the economy grew by 9.2 per cent, down from 10.3 in 2010.

The new GDP target, if hit, would be the first dip below 8 per cent since 2004, a significant change for the world’s second-largest economy. China is a huge buyer of raw materials – its demand takes up more than 40 per cent of the world’s copper, zinc, aluminum and nickel – so any slowdown in consumption can send prices tumbling in those commodities and many others.

The S&P/TSX capped metals and mining index sank 4.4 per cent Monday. Copper prices fell about 1 per cent, while gold was down $5.90 (U.S.) an ounce to $1,703.90.

Bart Melek, head of commodities strategy at TD Securities, said markets have been “almost euphoric” in the past few months, and the reality is sinking in that Chinese growth is slowing. Still, the Chinese government had already signalled a slowdown, he noted, and the pullback may prove short-lived.

On the floor of the Prospectors and Developers Association of Canada convention in Toronto on Monday, miners were focused on the nuts and bolts of their businesses, expecting that China will continue to underpin solid long-term demand for metals.

Clynt Nauman, chief executive officer of silver, lead and zinc miner Alexco Resource Corp., said China’s slower growth may prompt some price declines, but not a collapse. “It’s high-growth rather than unbelievably spectacular growth,” he said. “I don’t think it’ll have a big impact on our business.”

Labrador Iron Mines Holdings Ltd. vice-chairman Bill Hooley said that last year, his firm sold all of its production to China. Still, he said, “China slowing down doesn’t necessarily mean the iron ore price collapses, though demand may weaken.”

Patricia Mohr, commodity market specialist at Bank of Nova Scotia, said Chinese growth performance is exceptionally important because “China is highly dominant in most raw materials markets around the world.”

Ms. Mohr and other commodity experts say they expect the price softness to be temporary, with strength in the sector to resume within months thanks to broad growth in Asia, an improving U.S. economy, and a slightly improved picture in Europe.

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