SELLING was broad based last month as commodity markets went off the boil on news of China's moves to tighten credit policy to cool its economy.

Predictably, industrial metals bore the brunt of the selling, with Shanghai copper erasing a near-five per cent gain and steel futures hitting their downside limit.

The 19-commodity Reuters-Jefferies CRB Index has sunk 23.75 points or 8.2 per cent since the start of 2010, while the S&P GSCI index has lost 9.6 per cent. Key energy benchmarks declined in January, with WTI crude oil, heating oil, gasoline and US natural gas prices all down.

RBC Capital Markets strategist George Davis reckons copper, zinc, aluminium and lead are now staring at bearish trend reversals, while crude oil and CRB index could test their 200-day moving averages.

'The significant shift in risk appetite that has taken place over the past three weeks has had bearish implications for commodity and equity markets,' he wrote in a report.

Part of the slowdown has to do with China's credit tightening, which is aimed at quelling asset bubbles in some segments.

The People's Bank of China said last month it will raise the reserve requirements for domestic banks, while the country's banking regulator now plans to clamp down on excessive credit.

'We have been calling for a correction in base metal prices since late 2009, but the declines in recent weeks, ranging from 14 per cent for nickel to 28 per cent for lead, have already brought prices close to our mid-2010 downside targets,' said Nick Moore, head of commodity strategy at Royal Bank of Scotland.

January's sell-off extended beyond metals to include energy, as WTI and Brent crude oil retraced from levels above US$80 a barrel early in the month and are now trading in the mid-US$70 range.

In the dry bulk space, Morgan Stanley said the stocks under its coverage declined an average of 3 per cent, with the exception of tankers, on fears of belt tightening in China.

That concern triggered a broader slump in Asian markets, 'sent iron ore prices 3 per cent lower week-on-week and pressured rates for all eastbound voyages', it said.

'Cape-size routes to the Far East earned about 20 per cent less than the previous week. Panamax vessels earned 14 per cent less, despite strong demand for grain out of the Atlantic Basin.'

The silver lining is that Asian oil demand so far this year appears to be strong, based on activity in the tanker market.

For example, 'oil shipments to the Far East are currently at record seasonal highs both out of the Middle East and out of West Africa', Morgan Stanley said.

Even though rates for Very Large Crude Carriers have slipped, orders were buoyed by healthy Far East-bound volumes out of the Middle East, showing continuing strong crude demand from Asia.

The hope is that a strong grain season will help support dry bulk rates and offset any near-term demand decline due to fears of Chinese credit tightening and the Chinese New Year lull.

Citigroup believes the OECD demand is a key price factor in the first half of this year, due to slowdown in Chinese consumption, 'and we believe there is significant excess unreported inventory in copper and nickel, though less so in other commodities', wrote analysts Alan Heap and Alex Tonks.

In the second half of the year, there should be continued growth demand as consumption figures in China look healthy. For example, Chinese electricity consumption was up 27 per cent year on year in December, while the number of cars manufactured increased 90 per cent.

'Importantly, we believe continued investment fund inflows will support commodity prices, even in the face of demand weakness,' Citi said. 'Index investments, in particular, increased further in late 2009 and we believe there was a further allocation of funds to commodity markets early in 2010.'

RBS views the hefty overhang of off-market stocks of copper in China as a headwind for the next six to nine months and believe that a period of destocking will be required before copper can return sustainably above US$7,000 per tonne.

'Destocking will come from strong domestic demand growth or lower copper imports. Although we do think the latter represents a headwind for copper, never underestimate China's voracious appetite for raw materials.' said Mr Moore.

Stronger than expected Chinese copper demand growth in 2010 could result in the erosion of unreported stocks without refined imports falling anywhere near the lows seen during the last period of destocking in 2006, he adds.

Citi retains copper as its preferred base metal due to declining output from existing operations and availability from new projects in the long run.

Meanwhile, it believes coal supplies will likely remain constrained by infrastructure in Australia, South Africa and Canada.