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Warning: China may trigger fresh rout in commodities

Two employees tie up steel bars at a steel-making plant in Ganyu, China.
ChinaFotoPress | Getty Images
Two employees tie up steel bars at a steel-making plant in Ganyu, China.

Commodities just can't catch a break – and China's upcoming gross domestic product (GDP) release on January 20 could throw another punch at the beleaguered asset class should it underperform expectations, warn analysts.

"We are days from the release of China's Q4 GDP and copper is the best barometer of growth. The rout gives me reason to believe China's growth is not only moderating but is slowing faster than estimated," Evan Lucas, market strategist at IG wrote in a note.

"If China disappoints next Tuesday, brace for a real rout in commodities," he said.

Red metal, red charts

Copper, regarded as an important indicator of economic health, joined the selloff in commodities Wednesday after the World Bank downgraded its growth outlook for the global economy.

The global economy is forecast to expand by 3 percent this year,the Washington-based lender said in its Global Economic Prospects report released on Tuesday, a notch lower than its previous forecast of 3.4 percent made in June, but up from an estimated 2.6 percent in 2014.

The red metal suffered its biggest one-day slide in more than three years on Wednesday, with three-month copper on the London Metal Exchange falling more than 8 percent at one point to $5,353 a tonne before settling around $5,655 on Thursday.

The World Bank expects China's gradual pace of deceleration to continue,forecasting growth in the world's second largest economy to slow to 7.1 percent this year from an estimated 7.4 percent last year.

Read MoreWhat is behind the meltdown of commodity prices

China plays a dominant role in the commodities market because it's the world's largest consumer of energy and metals, including copper.

"In our view, the significant pressure on copper price lately indicates either a noticeable slow-down in demand [out of China] or troubles in the shadow banking sector, or both," said David Cui, strategist at Bank of America Merrill Lynch.

A risky number

China's GDP growth is expected to have cooled to 7.2 percent on-year in the final quarter of the year, according to a Reuters poll, down from 7.3 percent in the third quarter.

This would mark the weakest expansion since the first quarter of 2009, in the depths of the financial crisis, when growth slumped to 6.6 percent.

"If China's slowdown is deeper than expected, there may be concerns that demand for commodities is weaker than people think, so commodities will react," said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole.

There's even a risk the commodities market could react adversely even if growth is in line with expectations, he said.

"Because of the sensitivity of the market at the moment, it's possible that headlines stating China's growth has slowed to a five-year low will be taken badly by commodities."

More than China's economic data, Ric Spooner, chief market analyst at CMC Markets says sheer market momentum alone could drive commodities lower.

"The one main potential driver of commodity prices is momentum itself – the price declines in themselves driving further price declines," Spooner said."When you have an absence of buyers, you get sharp price movements."