Bruce's Commentaries / 10.12.2018

Bruce’s Metal Market Commentary – October 2018

Bruce’s Metal Market Commentary – October 2018 - Image

There is still a lot of good economic news, and yet a lot of uncertainty. The economy is strong, with unemployment at its lowest in 50 years and consumer confidence very strong. Automotive sales are down but still around 17 million annually. The ISM manufacturing index was down to 59.8 last month from 61.3 in August. Industrial production is good and nondefense capital goods new orders are down .5%, excluding very strong aircraft sales. Rotary rigs are up 30% from last year and oil prices are the highest in over two years. Even though oil prices are high, US gas production is strong and prices have not spiked, excluding any short-term storm surges. The oil spike in a large part is due to the Iranian sanctions that have decreased that country’s oil sales. The sanctions don’t take full effect until November, but anticipation has already reduced their output.

Federal Reserve Chair Jerome Powell sees inflation as flat and calls the economy “extraordinary” and “particularly bright.” He said, “There is no reason to think that this cycle can’t continue for quite some time, effectively indefinitely.” I am not an economist, but I remember thinking the same thoughts about the economy in early 2008. I certainly hope he is correct.

Unintended consequences from the tariffs continue. Ford estimates that the tariffs will increase its cost of manufacturing cars by $1 billion. Most consumer products that use aluminum and steel will need to pass along the increased costs to consumers. The US reached trade agreements with Mexico and Canada, but so far the aluminum and steel tariffs are still in place. Trade with China has also decreased because of tariffs. Still, the US has threatened more sanctions.

According to macroeconomic analysts, the trade war between the US and China will cost both countries billions of dollars and a large number of jobs. I am not sure what the benefit to us will be in the long term, but the short term is still problematic. This uncertainty is causing a lot of delays in long-term investments. Without a clear strategy, most businesses will remain on the sideline before risking capital.

China’s PMI has been dropping to nearly 50; under 50 is a sign of economic contraction. On Sunday, China announced a $175 billion capital infusion into its banking system, which will stimulate growth and eliminate any issues it has suffered due to the trade wars.

The trade war also continues to affect scrap prices. Right now, no scrap exports are heading to China. Scrap aluminum prices continue to drift lower, prime aluminum prices are down by about 1 cent a pound and the price of P1020 is still at the same level as it has been for the last three months. Secondary scrap has been flooding the market since the nonferrous shredded auto scrap that was going to China instead is entering the domestic market. Aerospace chips dropped another 3 cents this month, bringing the price down one-third in value from its high in March. Nickel and stainless steel prices also dropped again. Copper is the only price that went up in October.

On the steel side, hot rolled coil has dropped to $825 per ton, and iron ore prices are now at $65 per ton, which is down from the start of the year but up from its lows. Scrap steel prices rebounded from last month and are up $10 to $20 per ton, depending on the region. Steel mills are having an incredible year with strong demand and high profits due to the tariffs.

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