Bruce’s Metal Market Commentary – May 2018

Business decisions are based on strategy, planning, and an understanding that disruptions and uncertainty will occur and we will need to react to and adapt to them. A number of factors that have occurred in the last 30 days have brought such disruption and uncertainty. First came Section 232 tariffs and quotas, along with the rapidly changing modifications. Then, $50 billion in U.S. trade tariffs were imposed on China, and China retaliated with $50 billion in tariffs against us. Plus, the U.S. imposed sanctions on Rusal aluminum and announced Iran nuclear agreement changes. The North Korea peace agreements are moving forward, which is good news.

All of these factors have led to higher prices on steel, aluminum, and oil. There will be some price overreactions and they may end up retreating somewhat, but the current trend is definitely upward. The main gauge used by the Fed to measure inflation is the PCE, personal consumption expenditure. The core PCE was up 2.5% in Q1, the highest in seven years. Over the last 30 years, many economists have talked about inflation increasing, but it has remained very low for a long time. However, it looks to me like we will see inflation in the near future. Higher interest rates slow economic growth and the Fed generally raises interest rates to keep inflation capped at about 2%.

Now for some good news. Industrial production, new orders, durable goods, manufacturing, car sales, and housing are all in the positive area. ISM and PMI are still over 50%, and China’s Caixin index is also positive at just over 50%. GDP in Q1 of 2018 was lower than Q4 of 2017 but is expected to be up in Q2 and Q3.

On April 9, the U.S. enacted sanctions on Russian oligarch Deripaska and his Rusal aluminum company. Rusal is the world’s second-largest prime aluminum producer, supplying 7% of the world’s aluminum and 13% of the United States’ aluminum. This sanction immediately froze Rusal aluminum shipments worldwide and affected anyone doing business with the company, with the exception of China. Prime aluminum prices shot up from $1.09 per pound to over $1.35 per pound in less than two weeks. At the end of the second week, the US announced that the sanctions were being postponed until October 23. The chaos and market disruption was abated and prices fell to the mid-$1.20 range. Primary scrap aluminum prices jumped 8 cents in May, the highest price in three years, but secondary aluminum prices did not change much. The other nonferrous scrap prices were stable.

HRC prices continue to be higher in light of Section 232. I have attached a letter to the editor that was printed in American Metal Market, which outlines the issues of Section 232 and how it is hurting almost all manufacturers and consumers. The deadline for implementing the tariffs has been watered down from the original form and now will not go into effect until June 1. Hopefully, we will also have a favorable NAFTA agreement by then.

There was no change to the scrap steel bush price for May, and stainless steel prices were up.

There is an old Chinese proverb which states: “You should live in interesting times.” It is also meant as a curse.

“Remember to look up at the stars and not down at your feet. Try to make sense of what you see and wonder about what makes the universe exist. Be curious. And however difficult life may seem, there is always something you can do and succeed at. It matters that you don’t just give up.” —Stephen Hawking

Work safe. Work smart. Profits will follow.