SINGAPORE: Copper edged lower on Wednesday, giving up early gains, after data showing factory activity in China falling to its lowest in 32 months renewed worries about demand in the world's biggest copper user at a time when developed economies are struggling.
But hopes that the disappointing data may push Beijing to relax monetary policy, which would eventually boost the country's demand for raw materials, helped cap copper's losses.
The HSBC flash manufacturing purchasing managers' index, the earliest indicator of China's industrial activity, dropped to 48 in November, a level not seen since March 2009, rekindling concern that the country may be slipping towards an economic hard landing.
"It's a weak number and well below expectations. We could see more weakness in prices later in the day, but this data must spur the Chinese authorities to loosen policy," said Nick Trevethan, senior commodities strategist at Australia and New Zealand Bank.
Three-month copper on the London Metal Exchange eased 0.2 percent to $7,314.75 a tonne by 0707 GMT. Copper rose as high as $7,462.75 before the China data was released.
In Shanghai, the most-active February copper contract dropped 1.2 percent to close at 54,310 yuan ($8,500) per tonne.
ANZ now expects China, the last hope for commodities in the face of weaker economies in Europe and the United States, to cut banks' reserve requirement ratio "by the end of this month or early next" following the poor PMI data, which should support demand for copper, said Trevethan.
Already, China's central bank has cut reserve requirements for five rural banks as part of efforts to support the rural economy, two sources with knowledge of the matter said on Tuesday, fuelling expectations the big banks may be next.
China has been raising interest rates and the reserve requirement ratio for banks to tame inflation, but an easing in consumer price rises in October has given Beijing room to fine-tune policy to support economic growth.
With the United States and Europe preoccupied with addressing heavy debt, investors are relying on Chinese demand to boost prices of commodities such as copper, which is down nearly 24 percent this year, its first annual decline since 2008.
Despite tighter credit, China's imports of refined copper rose 7.2 percent in October from September to hit an 18-month high, fuelled by steady demand.
And some analysts say China may still be able to afford a soft landing notwithstanding the latest PMI data.
The next policy step may be broader measures to prevent a severe downturn, said Tony Tong, a strategist at Everbright Group in Hong Kong.
"A hard landing is unlikely to be seen as we also expect the government will adjust its policy to enhance a soft landing," he said.
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