Bruce’s Metal Market Commentary – January 2019

Forecasting the future is absurd, but I like to read forecasts from people I believe have a special insight into what may happen. I understand it is an educated guess based on many assumptions. Even though I know forecasting the future is absurd, it still enables our company to come up with our business and metal assumptions. Our team then develops a strategy and a budget for the year, which is the true benefit of analyzing the forecasts.

That being said, here is my forecast for 2019. I believe we will see slower growth worldwide. The US GDP will drop from its over 3% rate in the second half of 2018 to 2.5% in the first half of 2019, and down to 2% in the second half of 2019. There may be two Federal Reserve interest rate hikes. China’s growth rate will also drop from the 6.5% level to 6%, or even lower. Trade issues with China will be resolved and the tariffs will be reduced, and the US and China will both claim major victories when a resolution is announced. This will help our manufacturers be more competitive. Metal prices will stay in a tighter range than last year and drift lower. Hopefully an infrastructure agreement will be implemented that will help the metals industry.

I did not have my lawyer review my forecast so I’m including a long disclaimer about my statements: My initials are BS and that is the best disclaimer I can make.

Despite all the ugly stuff we will be reading about how the economy is trending down, the economy is still doing well. Unemployment is low, especially in manufacturing, where there are over 400,000 job openings. I assume that is for skilled labor.

Now, here is the ugly stuff. The ISM Manufacturing Index dropped from 59.3% to 54.1% in December and new orders dropped 11 percentage points. Oil continued to drop in December and then rebounded this month. Lower oil prices are good for the economy unless you manufacture for the oil industry. Goldman Sachs lowered their Brent price forecast 7% to an average of $62.50 per barrel for the year. [Forecasts are absurd]. Car sales still ended the year at 17 million after numerous predictions they would be much lower. Home sales are down because of interest rate increases. Headline reports show that consumer confidence dropped by the most in 41 years, except it is still very good.

China is slowing down, too, and is hurt by the trade tariffs. The Caixin broke the 50 barrier and is now in contraction at 49.7. The official government PMI was also down to 49.4. Car sales plummeted in November and December. The Chinese government continues to pump money into the banking system and will do what it needs to do put more into the infrastructure.

Last year prime aluminum and copper were down 18%, nickel was down 16%, and iron ore prices were close to the same at the end of the year. Aluminum scrap was worse due to the 10% tariffs and the Chinese reducing imports of almost all US scrap, and the reduced exports overwhelmed our secondary scrap market. By the end of 2020, China reports that it will close off ALL scrap imports from ALL countries.  Aero chips fell 37% year-over-year and 42% from the peak in May. Primary scrap was not hit as hard because there was not as much exported to China, but it was down 14% YOY and 37% from its June peak. Copper scrap fell 20% and stainless scrap was down 29%. Amazingly, all this happened in a very good business year.

January has also started off on the weak side. Prime aluminum and prime scrap are down, Aero chips  flattened out and remain the same as December, and the secondary prices may have bottomed out. Copper, nickel, and stainless prices have also fallen this month. Scrap steel, which is usually up in January, also was down $25 in Chicago and $48 in Alabama.

I am attaching an article on Herb Kelleher, who was a Southwest Airlines co-founder. He was both a brilliant businessman and an incredible human being whom I greatly admired. One of my favorite quotes from him was when he was asked how he took care of his customers. His response was: “I don’t take care of my customers. I take care of my people and my people take care of my customers.”

Work Safe. Work smart. Profits will follow.