Copper heads for bear market as confidence vanishes

Copper tumbled to a six-year low on Monday, as weak manufacturing data and the selloff in Chinese equities continued to weigh on industrial metals.

Three-month copper prices traded erratically on Monday on the London Metal Exchange, falling to $5,142 per ton—a low not seen since July 2009—before paring some losses in the afternoon to trade around $5,176.

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Copper production in Johor, Malaysia
Munshi Ahmed | Bloomberg | Getty Images

This came after the final reading of the Caixin China manufacturing purchasing managers index showed a two-year low of 47.8 in July.

"As with many other China-exposed commodity markets, copper's trade has been undermined year-to-date by surprisingly subdued economic activity in China," said commodity analyst at Morgan Stanley, Susan Bates, in a note to clients on Monday.

"While global markets track a plunging copper price, the industry's ability to deliver into even a weakened demand growth outlook appears challenged. Reports of labor unrest, power outages, grade declines, floods and droughts, have all conspired to remove 500 kilotons (1,000 metric tonnes) from the market in 2015."

The red metal is on track to enter bear market territory—where an asset dives 20 percent or more in a two-month period. It has fallen steadily from a high of $6,480 in May 5 this year as worries on the state of the Chinese economy and slowing demand for copper have mounted.

The outlook for the rest of the year looks gloomy.

Goldman Sachs slashed its price target for copper at the end of last month, revising its long-term price forecasts for the metal by as much as 44 percent.

The bank sees copper falling to $4,500 per ton by the end of 2016 and remaining at this level throughout 2017 and 2018. This is down sharply from their previous forecasts of $7,000 a ton in 2017 and $8,000 in 2018.

Other industrial metals were also hit on Monday, with three-month aluminum hitting a six-year low of $1,601.50 a ton, a drop of more than 20 percent since mid-May.

"The strong U.S. dollar / weak producer currency environment continues to weigh on the industrial metal complex, but we are starting to see some signs of a producer response. However, in most markets we have not yet reached a critical mass of closures," Deutsche Bank strategist, Michael Lewis, said.

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China sentiment

China's Shanghai Composite index remained firmly in the red on Monday, closing down 1.1 percent, on the back of renewed concerns over the world's second-largest economy.

Commodities and Chinese equities were among the worst-performing assets in the world in July, with the Shanghai Composite reporting it biggest monthly lost since August 2009, falling over 14 percent.

But some investors remain convinced of China's long-term growth story, despite the dramatic plunge in the stocks and shaky economic data releases of late.

"While the slide in China's mainland stock market is dominating headlines, investors should remember that the long-term story for China is reform. Despite short-term policy errors that triggered the market sell-off, actions by the state reflect China's desire to implement financial and structural reforms to boost long-term growth. This is occurring at a much faster pace than anyone could have anticipated," investment director for GAM, Michael Lai, told CNBC.

"State intervention to halt the slide in the A-share market was wrong. Although the market stabilization measures had the desired effect, it came at the price of an un-investible market, undermining the state's own plans for market overhaul," he added.

"The government now needs to step back and let market forces determine the fair price at a sector and individual stock level."