Bruce’s Metal Market Commentary – June 2019

The 3 T’s: Tariffs. Trade Wars. Tweets.

There is a considerable amount of negative economic news out there right now. It is not negative at the same level as the Great Recession, just a softer tone to manufacturing and business. I concentrate on the indicators that most affect manufacturing.

Nondefense capital goods new orders excluding aircraft were down 0.9% in April. The forecasts I read predict further declines the second half of the year and into early 2020. Factory production also declined to its lowest level in 30 months. The forecast is for manufacturing to peak midyear and then slow down somewhat into next year. Another good leading indicator is the ISM, which fell from 52.6 last month to 50.6 now. Also declining are durable goods, retail sales, home sales, motor vehicles and car parts, and US freight demand has been down five months in a row. The good news is that freight rates are down 20% from their highs. Manufacturing activity for the rest of the world (ROW) also been declining.

China is also slowing down. The official PMI fell into contraction from 50.1 to 49.4. and the Caixin held steady at 50.2. China’s auto production and manufacturing is also down. Trade wars and tariffs are having an impact on the country’s economy. But there are predictions for China to grow the second half of this year. Earlier this year the country announced additional restrictions on scrap imports – including ferrous and nonferrous metals – that would begin in July. But now the Chinese government announced its intention to grant import licenses and implement scrap quotas by the end of June.

Where is the good news? The Material Handling Industry Business Activity Index, published by Prestige Economics, is all positive. That survey is taken at the end of each month and is a solid indicator. The Michigan consumer confidence index remains high. Jobs growth was slower but the unemployment rate is still 3.6%. Consumer spending and personal income are up and the core rate of inflation is still under 2%. Talk of a Federal Reserve rate cut is everywhere now. New orders and the business activity index were very strong, as were shipments, unfilled orders and future new orders. The NFIB Small Business Optimism Index indicated that small business sentiment in May increased 1.5 points to 105.0, eclipsing pre-shutdown levels.

Never mind the good news. For the third month in a row, every metal price is lower. The ROW manufacturing activity has been declining since January 2018. US manufacturing is stronger than the ROW, but it too is now declining. This factor has a great impact on metal prices. I just attended the Harbor Aluminum Summit in Chicago where this was discussed, and they anticipate the manufacturing activity cycle will increase in the second half of this year, then decline again next year. I am including my notes and take-aways from the meeting as an attachment. Please take heed, I am a macro guy who is not good at taking notes.

Scrap aluminum markets remain ugly. That is not because business is bad, but some of the previously mentioned factors are at play in this sector as well. China will restrict global scrap imports starting July 1, or the end of June, and the 10% tariffs are attracting scrap to the US. Smelters are at capacity and are importing slab to roll into finished product — more scrap. Automotive aluminum sheet has a very high scrap rate and ROW aluminum production is set for its largest expansion to come on stream next year. Demand is good but not growing as fast as supply, therefore the mill scrap discounts continue to get wider for many alloys. Talk at the Harbor Aluminum Summit was of this potentially continuing for another five years.

Segregated aluminum alloys took the biggest hit, down 2 to 4 cents per pound. Secondary alloys fell 1 cent per pound, copper was down 16 cents and stainless was down 8 to 9 cents. Steel prices fell $20 per gross ton in the South. HRC is below $570 a ton and looks to be headed down to $500, which should benefit our manufacturers.

As a final note, our base of 500 manufacturers who cover many industries is having a solid year. We will continue to control what we can and make good business decisions. We have a simple philosophy at Shapiro: “Everyone makes a difference, and we will create our future.”

“The main ingredient to stardom is the rest of the team.”  -John Wooden

Work Safe. Work smart. Profits will follow.