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.