Bruce’s Metal Market Commentary – September 2018
Economic news continues to be generally positive, with only housing and auto sales showing weakness. Auto sales dipped to 16.7 million in August, the lowest since August 2017, signaling that the expected second-half of the year slowdown is underway. The GDP for Q2 grew at a rate of 4.2%, the best pace in nearly four years. The PMI is still strong but trending down. Consumer confidence is very high and wage growth has picked up to its highest since 2009.
The Chinese Caixin experienced its weakest growth rate in more than a year, falling to 50.6, which is still in positive territory. Although manufacturing in China is slowing, the government is energizing the real estate market with $13 billion in increased spending, bumping up real estate investment 32.4% year over year.
Trade tensions with China continue to be active. After previously imposing $50 billion in tariffs, President Trump has threatened another $200 billion in tariffs on Chinese imports. The 25% steel tariffs and 10% aluminum tariffs have taken effect and do not help most US manufacturers, only the 80,000 employees involved in producing steel and aluminum. Many manufacturers have requested exemptions, but the process is slow and not many exemptions have been approved yet.
We do have a new NAFTA agreement with Mexico, although Canada is not yet on board. The agreement – which leaders say will have a new name – will allow auto manufacturers to import vehicles duty free if 75% of the materials and parts are made in the US and Mexico. That’s up from 62.5% under NAFTA. . That should be beneficial for the US.
The positive economic news does not carry over to scrap metal prices, especially nonferrous metals. There are two major reasons scrap prices are falling. First, China imposed restrictions on scrap entering the country because of environmental concerns. This is an understandable measure considering some exporters were shipping trash and hazardous waste to China, but the 1% contamination standard also applies to metals. The restrictions virtually halted most scrap entering China, and then the Chinese government imposed a 25% duty on the scrap that still is allowed to be imported.
These various measures essentially have shut down US metal exports to China at a time when the US was exporting a huge amount of the nonferrous byproduct from auto shredding operations. Chinese secondary aluminum smelters used this metal to make alloys for automotive castings, but now domestic producers are trying to sell that metal to US secondary smelters. US secondary prices therefore have dropped by 10% in one month.
The excess nonferrous auto shreds has had a whopping effect on aerospace chips. The consumer price on aerospace chips has fallen from 49 cents in August to 41 cents per pound in September.
Other prime aluminum scrap prices dipped 5% to 10%, mainly due to US manufacturers doing well and scrap from other countries looking for US homes. In addition, a tremendous amount of new cars now use prime aluminum for auto bodies instead of steel. Those parts have a high scrap rate and mills cannot consume it all. Once again, an oversupply of scrap is causing prices to fall. Meanwhile, the price of prime aluminum, or P1020, is holding steady thanks to higher prices for alumina, which is used in aluminum production. The alumina price increase was prompted by a worker strike at Alcoa’s Western Australia alumina operation, in addition to a partial shutdown of another producer. US sanctions on Russian aluminum producer Rusal are also keeping prices strong.
The prices of prime copper and nickel are down 10% this month, and scrap prices have followed. The scrap steel market also is down slightly this month. Chinese iron ore prices are flat. Hot rolled coil is starting to fall and currently is down 8% from its high in June.
I have been in the scrap business for 48 years, and this is one of the strangest times I have witnessed. I know there will be a lot more changes in the months ahead. Stay tuned.
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