Bruce’s Metal Market Commentary – May 2019

Political turmoil and tariff chaos continue to make headlines and cause uncertainty. Last week, President Trump announced increased tariffs on $200 billion of Chinese goods; Chinese officials expressed dismay and promised countermeasures, while still expressing a desire to come to a trade deal with the United States. On Monday, China responded in kind and announced additional tariffs on $60 billion of U.S. goods. It’s uncertain if even more tariffs will come down the pike or if we will eventually have an amenable deal with China. The same uncertainty is true for our relations with Europe, Canada, and Mexico. We also have serious political issues with North Korea, Iran, and in the Middle East. My expectation is that we’ll have to deal with much uncertainty in the foreseeable future.

Economic data continues to be predominately positive. The Q1 GDP surprised almost everyone and was up 3.2%, but unfortunately, about half of that was due to increased inventories and net exports. Excluding that, GDP was up

1.5%. Business spending was flat and consumer spending — a key driver — was up 1.2%. A large part of the consumer spending increase was in health care. As they say, the devil is in the details. The Chinese economy is positive, but slowing. The Chinese Caixin and official PMI dropped to just above that 50 point which signals the difference between expansion and contraction. The combined European economies were up only .4% in Q1, but they are in contraction and at just over 47. As global economies get weaker, so does the price of industrial metals.

Nondefense capital goods new orders, excluding aircraft, were up 1.3% in March and beat expectations. The total industrial capacity utilization rate and industrial production were flat in March, while car sales and housing continue to be weak. The ISM dropped a large 2.5% but is still in positive territory at 52.8. Core inflation remains in check.

The more current news is that jobs growth remains strong and the unemployment rate is the lowest it has been in a long time. Another good current indicator is the Material Handling Industry Business Activity Index, a survey taken at the end of each month. The composite April index is strong and rose from March. Capacity utilization, new orders, and shipments are in expansion but trending down. Unfilled orders and exports were in contraction and also heading down. Inventories were up and did not change. Future new orders are up and have been expanding for 47 months in a row, or since the survey started. So, despite all the chaos, the economy stills looks good.

The old adage in the metals business – and throughout the greater investment sector – is “sell in May and go
away.” Whoops, looks like it was off by a month because every metal price has dropped. Prime aluminum dropped 5 cents per pound. Norsk Hydro dropped its world demand forecast to 1% growth and Rusal dropped its forecast to 3%. This is slowest worldwide demand increase in 10 years. Aluminum inventories are dropping in the LME, and Shanghai warehouses and production are slowing, although not that much. Scrap inventories in the US continue to build because of increased production, the US tariff premium attracting scrap, and the cut-off of Chinese imports. All the prime scrap prices dropped, but less than the 5 cents spot price. Aero grade chips were down a cent, and secondary smelters’ demand is dropping, along with the sale of new cars.

Ferrous scrap prices also dropped $30 to $40 per GT. The mills continue to be very busy and are running at over 82% capacity. However, steel warehouse inventories are increasing and the HRC prices are still going down at $640 and lower. The mills decided the best way to keep their margins was to drop the scrap prices, and those prices are the lowest they have been in over two years. Copper prices dropped by 15 cents a pound, nickel prices were down 47 cents a pound, and 304 stainless prices dropped 5 cents a pound.

I am attaching an interesting article: “Thoughts on US-China Trade Deal” by Edward Luce of the Financial Times. He

discusses trade policy and the problems created by relying on short-term tactics instead of a long-term strategy.

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