Will the massive stimulus plans expected to be launched by the United States and China boost copper consumption and give the industry and its exchange traded funds (ETFs) and exchange traded notes (ETNs) a much-needed shot of adrenaline?
On one hand, the stimulus packages have allocated a significant amount of resources and money to infrastructure, which would be beneficial to a metal like copper because of its extensive use in the power and transport infrastructure sectors.
On the other hand, Andy Home of Reuters states the following mitigating factors:
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Copper usage in infrastructure is not as significant as some believe. In fact, the biggest single component was the power sector, followed by telecoms; neither are targets of the Chinese or U.S. stimulus packages.
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The power cable sector is still running strong, meaning there is little room for the sector to expand.
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Copper demand in other key end-use sectors is expected to decline, offsetting any would be boost from the infrastructure sector. Building and construction accounted for around 35% of all copper products, and although the Chinese stimulus plan calls for building of low-income housing, this increase will most certainly be offset by the demand on the rest of the globe.
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Copper was most prevalent in the extremely broad-range manufacturing industry, which is expected to suffer the biggest blow during this recessionary period.
To make it even worse, with the bleak future of copper demand, countries that are major producers of the metal may face a devastating and uphill battle. Consider Chile, which is home to the world’s largest copper producer and boasts that copper is the nation’s largest export commodity which accounts for nearly one-quarter of the nation’s GDP – staggering numbers.
In a nutshell, it seems like the near future will be bleak for the red-shaded metal and those that are banking on a copper spike, courtesy of stimulus plans, may be disappointed.
The following ETFs and ETNs may be impacted by the future of copper:
iPath AIG Copper ETN (JJC): which lost 54.5% in 2008
iShares MSCI Chile Investable Mkt Index (ECH): which was down 37.6% in 2008
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.