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Following bullion, base metals were hammered to trade near multiyear lows on Friday at the benchmark London Metal Exchange, in the wake of reduced demand from the world's largest consumer, China.
Copper, for example, has weakened by a little over six per cent in the past two weeks, to settle last week at $5,224 a tonne, a level not seen after July 15, 2009.
The fall was in tune with expectations, due to uncertainty on demand from China, the world's largest consumer - it was till recently taking 45 per cent of the red metal's production.
A faltering Chinese economy, reflected in the sharp decline in the country's equity market, created a lot of uncertainty about its government's investment on infrastructure projects, the largest demand driver of base metals.
"The fall started from base metals following the Chinese equity markets crash. Bullion later caught the sentiment as global hedge funds started cutting their exposure in commodities which face an event risk. Now, with the United States' Federal Reserve's interest rate hike on the cards, commodities face a downward risk. Until the interest rate rise is announced, commodities would continue to remain volatile," said Gnanasekar Thiagarajan, Director, Commtrendz Research.
Bullion also fell nearly six per cent in the past two weeks, with gold in London at $1,099.05 an oz and silver at $14.68 an oz. In base metals, lead also declined six per cent to $1,706.5 a tonne in the period. Other metals, however, were resilient.
"The key delta remains China. The short and medium-term demand outlook there is challenging. Chinese copper demand is driven largely through government spending, as private consumption remains too small to offset a shift away from investment-led growth," said Eugene King, an analyst with Goldman Sachs, a global research entity, in a report.
Capital expenditure peaked in 2012 but remained strong in 2013; with the typical four to five-year lag between capex and delivery, the industry would start to see major new projects deliver at that time.
The base of existing mines is not declining, with expansion and higher grades offsetting what many expected to be the decline of the base.
Deflation should lower the marginal cost of production, reflecting productivity gains and cost reduction. Over the past two years, commodity producers have shown an ability to surprise the market by the extent to which they have been able to manage costs downward.
The study further expects a further 10-15 per cent reduction to the current marginal cost of production, expecting most new projects to be in the second and third quartile of the current cost curve, thereby adding to deflationary pressure.
As a consequence to the falling demand from China, base metals are likely to remain in a supply surplus. Data compiled by the International Lead and Zinc Study Group estimates the world market for refined zinc metal was in surplus by 143,000 tonnes during the first five months of 2015, as compared to 199,000 tonnes of deficit in 2014.
