Bruce’s Metal Market Commentary – August 2019

Trade War Commentary II

I am focusing on the trade war because of the topic’s importance to manufacturing. The US is the second largest exporter in the world behind China, and domestic industrial production has trended very closely with exports for the last 20 years. Exports have been trending down and were a negative drag on GDP in Q2. If this trend continues, we can expect it to hurt our business.  The Wall Street Journal ran an editorial piece on July 26 titled “The Trade-War Growth Slowdown.” It mirrors others’ concerns that the trade war is damaging the economy and could signal an impending recession:

“No trade deal before the election.” -Goldman Sachs

“Tariff and trade wars could put the global economy into a recession by the middle of next year.” -Morgan Stanley

“Trade dispute remains serious and persistent.” -Edward Meir

The current economic news is not all that bad. Although exports dragged down Q2 GDP, it was still up 2.1%. This is the sum of Consumption +2.85, Investment -1%, Net Exports -0.65%, and Government Spending +0.85. Consumer spending, which is 70% of consumption, was up 4.3%. Consumer confidence is still strong, unemployment is low, and there is wage growth. Nondefense capital goods new orders (excluding aircraft) were up 1.9% in June, following a 0.3% increase in May. Industrial production was unchanged, while car sales and domestic houses were negative.

Another piece of good news is our manufacturing base is very good at managing their business. We buy from many industries that cover automotive, HVAC, ship building, RV building, trailers, trucks, aerospace, and others. Your volume of scrap reflects your productivity, and this year’s volume is up 7% compared to last year. Because of our Lean Recycling, we know the volume increase is due to your increased business. We also believe smart manufacturers work with us because we help you reduce your amount of scrap. Thanks so much for your business.

Lead indicators continue to trend down. The ISM dropped to 51.2 from 51.7, a three-year low. The manufacturing ISM dropped to 50, which is the lowest since 2009. The China PMI and Caixin are below 50. The sum of July’s PMIs [ISM, Caixin, and Eurozone] is the lowest since December 2012. The Material Handling Industry Business Activity Index dropped in six of the eight categories it surveys. Capacity Utilization and Exports were unchanged at or above 50. The Activity Index fell 7 to 43, New Orders went from 45 to 26, and Inventories dropped from 56 to 38. The bright spot was for expected Future New Orders in the next 12 months, which is 61, but still down from 77.

In general, metals will follow manufacturing. All aluminum items fell slightly this month, and there is continued weakness in primary metal demand. Secondary aluminum scrap keeps falling with the demand for secondary aluminum ingot. Ingot prices declined to the lows of 2009. Copper was virtually unchanged while nickel rose, and stainless prices experienced a nice increase this month due to the nickel rally. Steel prices are up $20 a ton this month after falling four months in a row. Chinese iron ore prices hit a five-year high last month and then dropped 20% in a few weeks. HRC is near $600 per ton.

Do not put your faith in what statistics say until you have carefully considered what they do not say.   -William W Watt

Work Safe. Work smart. Profits will follow.