Base Metal Demand Softens

NEW YORK (TheStreet) -- With the end of the "Cash For Clunkers" program and a slowdown in demand for automobiles, some believe the recent uptrend in base metals will be in trouble and for good reason.

The domestic auto industry accounts for nearly 40% of metal demand and even though the "cash-for-clunkers" program sparked higher auto sales, there is still a huge stockpile of unsold vehicles and other finished goods that need to find buyers before manufacturers can justify increasing production and replenishing metal inventories. Overseas, China was a huge consumer of metals as it stockpiled commodities.

Domestic auto demand should remain relatively weak as unemployment remains a problem. The Labor Department recently reported a decline in Americans filing first-time unemployment claims, though the number is still much higher than that it would be in a non-recessionary period. One cannot purchase a new vehicle without a job.

Meanwhile, China is expected to be a leader in the production and consumption of automobiles, but this isn't what drove their need for base metals. Rather it was its stimulus package, which was heavily focused on infrastructure. With the stimulus package about to tend and infrastructure work slowing, the demand for base metals most likely will taper off.

In a nutshell, it's highly unlikely that the demand for base metals can be sustained at the levels earlier in the year.

Some equities that have benefited from the uptrend in base metals are the following: PowerShares DB Base Metals(DBB), which is up 65% from a February low of $10.95. It closed at $18.06 on Wednesday.