METALS INSIDER: Will stimulus plans boost copper?

- Andy Home is a Reuters columnist. The views expressed are his
own -

 By Andy Home

 LONDON, Jan 9 (Reuters) - Copper has turned out to be one of
the main metals beneficiaries of the annual rebalancing of the
big commodity index funds, primarily the DJ-AIG and the S&P GSCI
indices.

 However, the early New Year euphoria shows signs of stalling
and many LME traders are starting to refocus on the dire
economic outlook and its implications for metals demand.

 In an increasingly gloomy macroeconomic landscape the only
bright spot appears to be the expected boost to metal
consumption from the massive stimulus packages being planned by
China and the United States.

 Copper demand, it is widely assumed, will get a much-needed
adrenalin shot because of the red metal's extensive use in the
power and transport infrastructure sectors.

 But is this actually true ? Analysts at Bloomsbury Minerals
Economics have taken a hard look at the issue and found such
assumptions wanting.

 INFRASTRUCTURE BOOST WILL BE MODEST…

 It is the Chinese stimulus package that has most gripped LME
traders' imagination.

 The titanic 4 trillian yuan price tag may not be quite what
it seems but a core commitment to accelerate investment in key
infrastructure such as power transmission and railways should be
very good news for copper demand.

 However, there are two significant mitigating factors,
according to Paul Dewison, writing in Bloomsbury's December
Copper Briefing Service.

 Firstly, copper usage for infrastructure is not as
significant as is assumed by many traders, accounting for only
around 15.5 percent of global copper products demand in 2008.

 The biggest single component last year was the power sector
(8.6 percent of products demand), followed by telecoms (4.2
percent) and other sectors, of which railways are only one part,
(2.7 percent).

 Telecoms is not a core target of either the Chinese or the
U.S. stimulus package and the latter's focus on road rather than
rail networks is not great news for copper either.

 The second issue is the fact that the power cable sector is
one of the few areas of copper demand that is still running
strong.

 That means there is little room for further expansion.
Indeed, as Dewison points out, a lack of private investment in
countries such as India could even be a net negative for copper
demand in this sector going forwards.

 Bloomsbury's prognosis is that the stimulus packages will
benefit copper usage for infrastructure but only to the tune of
a rather modest 5.8 percent growth in 2009.

 Since infrastructure is a relatively small component of
overall copper demand, that would equate to just 1 percent
growth in global copper demand.

 Not quite what copper bulls on the London "street" are
hoping for!

 …AND NOT ENOUGH

 The bigger problem for would-be contrarians is that copper
demand in other key end-use sectors is going to fall sharply,
offsetting any boost from increased spending on infrastructure.

 Building and construction accounted for just over 35 percent
of global copper products usage last year, twice as large an
end-use sector as infrastructure.

 Part of the Chinese stimulus package is a commitment to
boost low-income housing construction rates but this positive is
going to be more than offset by the implosion of the
construction sector across the entire developed world, led by
the United States.

 Residential construction is already in freefall and
commercial construction is now starting to follow suit.

 Then there is the single biggest component of copper usage
last year, denoted by Bloomsbury's Dewison as "OEM and General,"
and accounting for over 49 percent of products demand in 2008.

 It breaks down into transport, industrial equipment, other
equipment and general.

 This is where copper's bellwether status derives from, its
close correlation to overall industrial production rates via a
host of end-uses across the manufacturing spectrum.

 And it is precisely this broad-ranging sector where copper
demand is going to take the biggest hit during the current
recessionary period.

 When Germany announces a 6.0 percent month-on-month decline
in manufacturing orders, as it did on Thursday for the month of
November, it spells big trouble for copper demand.

 Bloomsbury's prognosis is that overall copper demand is
going to fall by 5.7 percent this year relative to last year and
even then the risks remain to the downside because the extent of
the manufacturing trough is still hard to discern.

 Fiscal stimulus packages will make a difference but only in
the round, i.e. by reinvigorating a moribund commercial credit
market, putting more cash back into consumers pockets and,
eventually, putting a floor beneath collapsing property markets.

 It's going to be a long and painfully slow process. Anyone
hoping that infrastructure spend alone can offset the broader
deterioration in copper demand is going to be disappointed.