China copper demand set to revive after Olympics

LONDON (Reuters) - The Beijing Olympics have sharply reduced copper demand in top consumer China, but as normal life resumes, buyers are expected to revive the market, probably as soon as September.

Fears of U.S. recession and the damaging consequences for the global economy, particularly for China with large export markets in the United States, have been weighing on copper for some time now.

Chinese government clampdowns on manufacturing activity in the run-up to and during the games to improve air quality have further dampened a seasonally weak quarter for demand when factories shut down for repairs and maintenance.

"This is a seasonally slow time of year and the Olympics have had a big effect," said Michael Widmer, analyst at Lehman Brothers. "Demand for copper should pick up as we go into September, we may see some restocking in China."

Analysts say power problems because of natural disasters such as the snowstorms in January and the Sichuan earthquake earlier this year are still taking their toll, as is a decision by Chinese consumers to use up stocks.

China consumes about 25 percent of global production. The country's imports fell 17 percent in the first 7 months of this year to 920,420 tonnes compared with the same period a year ago.

Bearish sentiment for copper MCU3, used widely in power and construction, has helped send prices spiraling down since a record high of $8,940 a tonne on July 2 to around $7,400 now.

OLYMPICS MASK DEMAND

Behind that fall is the downtrend in industrial production -- a key indicator of base metals demand -- in China.

"Headline news for industrial metals is bearish in the form of sharply decelerating industrial production in China," said Michael Jansen, analyst at JPMorgan.

"We expect this to continue throughout the third quarter, but we do believe an acceleration in activity will take place in the fourth quarter and this ought to be a trigger to allow some of the base metals off the floor, copper especially."

Factory output in China slowed to 14.7 percent in the year to July, a 19-month low, from 16 percent in the previous month as manufacturers struggled with weakening export demand and rising raw materials costs.

Chinese industrial output in August is expected to slide again in August because of the Olympics.

"Issues surrounding the Olympics are affecting Chinese industrial production and likely masking true demand," said Joel Crane, strategist at Deutsche Bank.

"With plants forcibly shut and cars moved off the roads, some indicators that are monitored as signals of demand for industrial raw materials will trend lower from July-September, giving headline watchers a false sense of a slowdown."

OUTPUT SUSPENDED

For instance about 20 percent of the cable and wire makers in Northern China were asked by local government to suspend output to save energy for the Olympics.

But those factories will be up and running in September, while manufacturers, seeing the narrowing differential between prices on the London Metal Exchange and in Shanghai, are likely to try and replenish inventories.

"Imports in August could be much higher than the past three or four months," Deutsche's Crane said.

"If Chinese buyers resume a re-stocking program, LME inventories could see more draws, keeping global exchange stocks at their lowest sustained level since the late 1980s."

Rising copper stocks in LME warehouses -- up more than 25 percent since early July to around 156,000 tonnes now -- have also hit confidence in recent weeks.

But the 6 percent rise in stocks so far in August is well below the 32 percent increase for the same period in the years since 2001, analysts said.

(Additional reporting by Carole Vaporean)

(Editing by Peter Blackburn)