Copper has surged 87 percent in Shanghai this year as the country’s 4 trillion yuan ($586 billion) stimulus plan to revive economic growth spurred purchases of the metal used in construction and automobiles. The country’s central bank affirmed a “moderately loose” monetary policy Friday, easing concern surging loans and asset prices will lead to fiscal tightening.

“The funds just keep pouring money into the market as investors are encouraged by the steps the Chinese government is taking to revive the economy and the continued commitment to growth,” Zeng Chao, analyst at Everbright Futures Co., said from Shanghai today.

Copper for November delivery on the Shanghai Futures Exchange gained as much as 1.6 percent to 44,390 yuan ($6,498) a metric ton, the highest since Oct. 8, and traded at 44,080 yuan at 10:47 a.m. in Singapore.

November-delivery aluminum in Shanghai gained as much as 3.7 percent to 14,765 yuan a ton, the highest since Oct. 6, while zinc for November delivery added as much as 1.8 percent to 14,415 yuan a ton, the highest since Sept. 23.

Chinese banks extended a record 7.37 trillion yuan of new loans in the first half, triple the amount offered in the same period a year earlier, triggering a 7.9 percent expansion in GDP in the second quarter as the government encouraged banks to support the economy.

Property Demand

The increase in new bank loans helped spur demand for properties, helping home prices in 70 major Chinese cities rise for the first time in seven months in June. China’s passenger- vehicle sales rose 48 percent in June, the biggest jump since February 2006.

Copper is often used as an indicator for the world economy and may set the pace for other base metals because more than 50 pounds (23 kilograms) of copper is used in an average car and an average of 439 pounds is used in a 2,100-square-foot (195 square meter) home, according to the New York-based Copper Development Association.

Local steel makers are fretting over lower steel prices, mounting inventories and sluggish sales, no thanks to the weakening demand as a result of the spiral effect of the global financial crisis.

The latest move by the world’s largest buyers of iron ore, the Chinese steel makers, to push for a price reduction in their annual price talks with the three leading suppliers Cia Vale do Rio Doce, BHP Billiton Ltd and Rio Tinto Group, reflects the fact that demand for the commodity is slipping.

“Despite the softening input cost, we expect the sequential earnings momentum of domestic steel players to remain weak over the next two to three quarters,” AmResearch says in research note.

“A protracted down cycle in steel demand would inevitably erode the cash flow of working capital positions of steel companies.”

The research house points out that steel millers remain saddled with high inventory levels despite putting through massive write-downs over the last two quarters.

Steel inventories at Shanghai’s main port was reported to have jumped to a three-year high of 2.1 million tonnes in February from 1.3 million tonnes in December last year.

“Steel makers must be mindful of their inventories level,” says AmResearch.

As of December, most local companies had sizeable inventories because they had trouble clearing stocks in the face of declining demand.

According to AmResearch, this was caused by the muted steel demand, implementation lags in the Government’s pump-priming activities and a weak export market.

“Unless the Government quickly kicks off its projects under the Ninth Malaysia Plan, the long-term demand for steel remains uncertain,” says an analyst from the research house.

He adds that steel bar prices have not really rebounded since its fall from the peak, because local demand is still limited.

In contrast, OSK Research analyst Ng Sem Guan believes that the outlook for the steel industry looks positive, especially for long steel players.

Given that stimulus packages are being introduced across the globe, Ng expects steel players to benefit from the construction sector, which will benefit from many of the measures introduced in the packages.

“We expect the demand for steel to improve in the second half,” he says.

He adds that the local steel prices remain competitive and equivalent to international prices.

On the steel inventories, he says these came off a bit on a quarter-to-quarter basis from the third quarter to the fourth quarter last year, although some companies still possess “quite high inventories”.

However, he concedes that the international market is generally quiet now as countries worldwide are slowly slipping into recession.

Following China’s bid to push for a price cut in materials, OSK estimates a 30% cut would bring steel prices back to normal levels. The market is already expecting a 20% to 30% cut in iron ore prices, says Ng.

According to Bloomberg, both domestic and international steel makers have reached a consensus of a 40% to 50% cut in material prices amid the softening demand.

On the mini-Budget, Ng says, “It would certainly benefit all steel players, especially long steel players. There should be some applications for flat steel players too, but limited.”

Malaysian Iron and Steel Industry Federation (MISIF) president Chow Chong Long says the current domestic demand for steel is still weak, while exports continue to drop as a result of the downturn.

“Steel players are concerned with this situation as capacity utilisations of all steel mills have been less than 50% since the fourth quarter of 2008. This is sufficient to meet current low demand. We are not the only country facing this difficulty; other international steel players are also facing the same problem,” he adds.

According to Chow, in the last quarter (Oct - Dec 2008) alone, five major local steel players incurred losses to the tune of RM1.2bil. “If the market persists at this low level, the steel industry may see further losses in the upcoming quarter,” he warns.

Chow says the Government should give more support to the industry in order for it to pull through this difficult period.

So far, the first stimulus package has had a minimal impact on the industry, he adds.

“The impact of the second stimulus package announced recently depends largely on how fast the implementation takes place, and the amount for development expenditure over two years may not be so significant when translated into steel consumption,” he argues.

He says government assistance for the steel industry, which consumes a lot of energy, should also be in the form of lower energy costs, such as through a tariff reduction by Tenaga Nasional Bhd.

“The recent cut of 5% is grossly inadequate. From the formulation used for the previous 26% increase, the reduction this round should be in the region of 20%,” he adds.

Chow says other international steel players facing similar difficulties have begun to dump cheap steel in countries that are less protectionist, including Malaysia.

“We hope the Government would take appropriate actions to prevent cheap steel from being dumped in our country,” he says.

With the first indications for 2009 proving much worse than expected, the economy is on course to contract at least 3 per cent in 2009, compared with the Treasury’s central forecast last November that output would fall by only 1 per cent. Capital Economics, a consultancy, said the slump could reach 4 per cent this year.

But investors put aside the gloomy data and sent the stock market rallying as traders were cheered by an internal staff memo circulated by Vikram Pandit, Citigroup chief executive, claiming the bank had been profitable in the first two months of the year.

The FTSE 100 index closed 4.88 per cent higher at 3,715, while the S&P 500, which closed at a 12-year low on Monday, was up more than 6.4 per cent in New York, with similar rises in European markets.

The poor economic data will intensify pressure on Alistair Darling, the chancellor, who is aiming to introduce additional tax cuts in the Budget on 22 April even when the public finances are fast deteriorating. Most economists expect government borrowing to surge in 2009-10, hitting £150bn or about 10 per cent of national income. In the Budget a year ago, Mr Darling forecasted a deficit of only £38bn.

Such large borrowing on top of the eventual cost of taxpayer support for banks, estimated by the International Monetary Fund at 9.1 per cent of national income or £135bn, is likely to send the core level of public sector debt close to 80 per cent of national income, twice the limit the government said was inviolable until last autumn.

With industrial production falling 11.4 per cent in the year to January, the worst fall since January 1981, Neville Hill of Credit Suisse forecasted national income in the first quarter would drop back to “levels last seen in early 2006”.

The National Institute of Economic and Social Research estimated gross domestic product fell 1.8 per cent in the three months ending February, suggesting a similarly gloomy outturn for the first quarter. “The economy is experiencing a combination of a sharp reduction in stock levels and very weak demand for manufactured goods,” the institute said.

But Britain is far from alone in suffering industrial fallout from the recession. French industrial output declined by more – 3.1 per cent in January – and German exports are 20 per cent lower in January than a year earlier.

The silver lining in all these figures is that a substantial part of the pain in industry comes from temporary factory closures as manufacturers sell accumulated stock. A rebound can be expected once companies’ unsold stocks fall and production lines are restarted.