Photographer: Martin Leissl/Bloomberg

Trump’s $1 Trillion Plan May Buy Less Metal Than You Think

  • Infrastructure spending ‘a drop in ocean’ of demand amid glut
  • U.S. projects probably will take years to pick, design, build

Anyone expecting more from the Donald Trump rally in metals should probably consider just how much $1 trillion in government spending will actually buy.

That’s the amount the new U.S. president pledged to expand and rebuild American infrastructure like roads and airports over the next decade. While Trump has yet to make a formal proposal to Congress, investors already are betting a building boom will accelerate demand for raw materials. Prices for everything from aluminum to steel have surged since the election in November. Hedge funds hold their most-bullish position ever in copper.

But it can take years for any one project to be selected, funded and completed. And even then, Trump’s plan probably would add just 0.4 percentage point to global demand growth for steel and copper, Goldman Sachs Group Inc. estimates. For other metals like zinc or nickel, the additional buying will be “too small” to measure, according to Bloomberg Intelligence.

“It’s a drop in the ocean,” said Renate Cakule, a London-based principal analyst for steel at commodity consultant Wood Mackenzie. “It doesn’t change the global picture. It doesn’t have a big impact on the world outside the U.S.”

Trump’s 10-year plan is dwarfed by the $1.7 trillion spent in 2016 alone by China, the world’s biggest metals consumer. The Asian country -- home to the world’s second-largest economy -- accounts for 46 percent of the global demand for copper, used primarily in electrical wiring and indoor plumbing. The U.S. ranks second in the world at 8 percent. In the steel market, 44 percent of all demand occurs in China, compared with 7 percent in the U.S., according to Morgan Stanley estimates.

Spending $100 billion more annually on infrastructure would boost U.S. steel demand by about 3.5 million tons, according to Credit Suisse estimates. That increase could easily be filled from China’s surplus, estimated by Morgan Stanley at 72.4 million tons last year. In the case of copper, the additional spending may increase demand by 77,000 tons, according to Goldman estimates. That’s about 4 percent of monthly global production.

Few of those additional purchases are likely to occur right away. For a guide to how long some of these projects can take, consider the $3.98 billion rebuilding of the 61-year-old Tappan Zee bridge across New York’s Hudson River, located more than 30 miles (48 kilometers) upstream from the Statue of Liberty. The project -- including 110,000 tons of steel for new roadways and the bridge’s 419-foot towers -- took a decade of planning that began in 1999. Construction started in 2013 and will be completed next year.

Read more: A QuickTake explainer on Trump’s infrastructure plan

This year, public and private spending on infrastructure such as highways, bridges, public transit, rail, ports, waterways, airport runways and terminals probably will rise by just $3.3 billion from 2016 to $247.8 billion this year, not much more than the rate of inflation, said Alison Premo Black, the chief economist at American Road & Transportation Builders Association in Washington, D.C.

“You need to double current investment levels to have an impact and address most of the needs that have been out there,” Black said.

Also, while increased government funding on more projects would certainly expand raw-materials purchases, a big chunk of the spending will be on other things, including design, land acquisition and labor.

Metals Rally

Still, the prospect of accelerated building in the U.S. has helped to extend a metals rally that began in early 2016 with surprise demand growth in China. Copper posted its biggest price gain last year since 2010, and an index of six metals traded in London is off to its best start to a year since 2012. At the end of last month, hedge funds held a net-long position in New York copper futures and options contracts that was the largest since the government began tracking the data in 2006.

Among the most optimistic is the steel industry. Global prices for hot-rolled steel have surged 73 percent from a low in December 2015, including gains in the U.S., after a slowdown in cheap imports had eroded domestic earnings. In the past year, the value of producers has rebounded from a nine-year low in early 2016, ending the year up 46 percent. Shares of U.S. Steel Corp. have more than quadrupled in the past 12 months.

“We look forward to a better environment where there is going to be more activity,” said Mario Longhi, U.S. Steel’s chief executive officer. “It’s more than just roads and bridges. It’s airports. It’s water treatment stations. It’s all the infrastructure related to energy.”

Nucor Corp., the biggest U.S. steelmaker, estimates the increased infrastructure spending will boost demand for the metal by 5 million tons annually, CEO John J. Ferriola said on a Jan. 31 earnings call with analysts.

Timing Matters

There are already signs of some softness in markets, with copper on the London Metal Exchange, for example, falling 3.1 percent so far this month to $5,803 a ton.

And even as they welcome the prospect of more spending, some companies remain cautious.

Steel Dynamics Inc., based in Fort Wayne, Indiana, has as much as 2 million tons of unused production and shipping capacity, according to CEO Mark Millet. While more spending is “deeply needed in our country,” any pickup in building may not occur until later this year, he said.

At Caterpillar Inc., the world’s biggest maker of machinery for mining and construction, CEO Jim Umpleby said during a Jan. 26 conference call that while he is encouraged by Trump’s push on infrastructure, “timing issues” remain for the president’s plan, including whether it gets done at all.

“The metals market is assuming that he is able to implement things at a 100 percent perfection,” said Dane Davis, a New York-based analyst at Barclays Plc. All those bullish expectations can be undermined by “any sort of delays,” Davis said.

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