Bruce’s Metal Market Commentary – June 2018
Talk of Section 232 continues to dominate the metals industry. Much has changed, but the strategy is still very unclear. Yes, we do have some legitimate trade issues that need to be changed, but very little strategy is apparent in the Section 232 negotiations. Our trading partners and allies, Mexico and Canada, now seem to be our enemies, and what will happen with NAFTA is not clear. Steel and aluminum tariffs on imports from those countries are causing numerous problems for metal consumers and manufacturers. The Wall Street Journal reported last week that we could be in for a full-blown trade war. I would like to see the administration engage in more behind-the-scenes negotiations on the issues and less rhetoric.
Most of the indicators I follow continue to look good. Industrial production, total manufacturing, capital goods, rotary rig count, and other lead indicators are strong. The ISM report and the Chinese equivalent, Caixin, are both in positive territory. The only soft spot continues to be the auto industry, which is down 18% this year. Ford has announced that it will discontinue manufacturing most passenger sedans and instead focus on trucks and SUVs during the next decade. On the surface, that sounds crazy, but when you consider the advent of electric cars, it makes more sense.
The approval of the biggest increase in defense spending is another piece of bullish manufacturing news. The Navy is ordering 14 new ships, and orders of airplanes and other defense capital goods also will increase. That’s good news for our military personnel, who will see their wages rise.
The other big stimulus measures have been the $1.5 trillion tax cut and the $300 billion increase in federal spending. Our unemployment rate is very low, and the chance of inflation continues to increase as the economy grows. Former Fed Chairman Ben Bernanke said last week that this “makes the Fed’s job more difficult all around.” Bernanke went on to say, “What you are getting is a stimulus at the very wrong moment” because it “is going to hit the economy in a big way this year and next year, and then in 2020 Wile E. Coyote is going to go off the cliff.” That statement is enough to scare me.
June scrap metal prices are up slightly from May. Prime aluminum scrap is up 1.5 to 3 cents per pound. Aero chips are down 2 cents due to a slowdown in car sales and Chinese restrictions on secondary aluminum scrap imports. Nickel and stainless steel prices are up this month along with copper. Scrap steel busheling was up $10 per gross ton in Chicago and flat in Alabama this month.
Overall scrap prices for the first six months this year have mainly trended higher. The London Metal Exchange prime aluminum is virtually unchanged for the year, but the Midwest premium has gone up 13 cents due to freight costs and Section 232. The Rusal sanctions situation has mostly impacted the LME prices, and we still don’t know when that will be resolved. Secondary aluminum is up slightly and steel prices are up $30 a ton this year. Nickel and stainless have been the strongest.
“Great people are those that can make others feel that they, too, can become great.” -Mark Twain
And another fun one: “Formula for success: rise early, work hard, strike oil.” -J. Paul Getty
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