December 02, 2008

Recession reports - US demand for copper battered by housing and construction

Reuters reported that demand for base metals in the United States has been falling sharply on the back of the US housing debacle and the trend is likely to worsen with expected slowdowns in commercial and industrial building. So far metals investors have ignored doom and gloom from the world's biggest economy and instead poured billions into metals, especially copper which is up 27% on the year and trading near record highs at USD 8,480 a ton on the London Metal Exchange.

According to the US Department of Commerce, indeed US imports of refined copper are off almost 29% in the first two month of this year to 116,389 tonnes from 163,699 in the same period a year ago. Likewise, aluminum was off nearly 10% in the period and zinc imports are down 6%. Nickel, used in stainless steel, however, was up almost 27%. With the construction of a typical house in the United States consuming 439 lbs of copper, it was inevitable the collapse in housing would hurt demand for the industrial metal.

UK based commodity consultancy CRU said that 25% of the copper price was due to speculative demand. But with US metal imports slumping and Chinese demand growth also looking tepid, some of the fundamental support underpinning lofty metal markets in New York and London could be weakening.

Mr Edward Meir analyst of MF Global said that "Recession risks are rising. Demand in the United States is declining and demand growth in China is slowing. With all this going on and the woeful state of the US housing market, why on earth is copper around record levels? Fundamentally it makes no sense. This is all down to investment flows."

Ms Catherine Virga an analyst with CPM Group in New York said that "I expect copper demand in the US to be weak, especially in this first half of the year and even in the second half. If you look at residential housing, that market has been very weak."

Meanwhile US construction spending in February declined for the fifth straight month, hitting its lowest annual rate since mid 2005. Mr Torsten Slok senior economist at Deutsche Bank in New York said that "It is definitely clear that things are still looking pretty weak in construction for the home-building sector in particular.”

But the depressed state of housing in the United States, which accounts for about 40% of all domestic copper use, may be only the first hit to the construction industry. Signs are emerging that the commercial, industrial and heavy construction sectors, which have so far shrugged off the worst of the slump, are about to weaken markedly.