Bruce's Commentaries- Market Insights / 04.15.2020

Shapiro Metals Market Insight – April 2020

Shapiro Metals Market Insight – April 2020 - Image

Published April 15, 2020

We are faced with an unprecedented health crisis that is dominating our lives. When this began in the U.S. over a month ago, those who attempted to warn us about what could happen were called “chicken little.” Few people really understood what would happen. But now everyone understands we are being attacked by a virus that is difficult to defend ourselves against. The infection rate and the death rate have been going up exponentially, and tragically, over 24,000 individuals have died in the U.S. alone. The plans for how to keep ourselves and our families safe and healthy have been changing rapidly. Our lives have been drastically altered and the psychological impact will last for decades. Much of what we took for granted has been turned upside down, and we have newfound gratitude for the people who put their lives at risk to save us and to serve us. The healthcare workers, hospital employees, EMTs, people working in the food supply chain, police, firefighters, and other public servants are the true heroes. By the way, I am proud to say we are honoring the Shapiro team’s family members who are included in the essential workers group with “Shapiro’s Heroes” posts on our Facebook page. And[KP1] although nobody could have seen this pandemic coming, Shapiro has been preparing for its effects for more than a month to ensure our relationship with you continues as normally as possible.

I normally begin my insights by looking at the previous economic data for GDP, capital goods, durable goods, industrial production, employment, car and home sales, ISM, and lead indicators. The dynamic situation means all of this “current” information is now ancient. Most of that data from March would show that the economy is stable to slightly down. However, we know better. More than 16 million workers have filed for unemployment benefits in the last month, and that will continue to grow. Unemployment is at 13% and could hit 30%. For Q2, the GDP is forecast to be down 30% to 50%. Consumers make up 70% of GDP and everyone knows what is happening to the consumer. Outside of a few industries, virtually all businesses have been negatively impacted. There has been a massive amount of demand destruction, and some people have likened this economic crisis to a black hole.

Another piece of ancient history is the Shapiro Nonferrous Scrap Activity Index. The industries we service include aero, auto, HVAC, defense, transportation, building and construction, food service, and recreation. Our top 50 customers across our 10 locations throughout the Midwest, South, and Southwest were down 3% compared to February. We are well diversified throughout these industries and our customer base. Even so, we are expecting volumes to be down substantially in April with the effects of the plant slowdowns. Again, we have been preparing for this for over a month and will make sure you are serviced and taken care of.

The post-pandemic recovery will take place on two stages. The first one is on the psychological/emotional level, which was affected by the hard, fast stop to life as we knew it. The scars from lost jobs and businesses will not heal easily, and I am not sure how long it will take for the distress to subside. I recently read a quote by Adam Smith who wrote The Wealth Of Nations in 1776: “Our distress is far greater when we fall from a better situation to a worse one than we ever can enjoy rising from a worse to better.”

The second recovery stage is the economy. I have commented before on the phrase “I think I know, but I don’t.” In this case, the appropriate phrase is “I know I don’t know, and don’t I know I don’t know.” [My English teacher would flunk me for that.] Will the recovery be a U, a long U, a V, or a Nike swoosh? Who knows? There are lots of theories ranging from a depression to a long recovery. We learned a lot from the Great Recession, and the Federal Reserve Board has been adding much needed liquidity to the market. It is continuously supporting banks and the bond market for municipal and corporate bonds, which is critically needed at this time.

The government strategy is to make sure the health issues are resolved, and then to ensure that business is in a position to recover. The government is keeping businesses and individuals alive through the CARES Act, and I am sure most of you are aware that the Payroll Protection Plan is a very beneficial part of this. Some people are complaining that assistance is not happening fast enough, but I am amazed at how fast the bill was written and agreed upon. This document was close to 900 pages and was done in a virtual heartbeat. Shapiro Metals applied for and was approved for the PPP, and we were told the money should be released in 5 to 10 days. This program is going to ensure that many good companies and people get the help we need. More aid programs are expected to launch later this month.

Looking at the recovery in China may indicate what to expect here in the US. The virus started at the beginning of the year in China and hit its peak mid-February. The virus was contained with a controlled economy and a total lockdown of Wuhan. Even though the numbers of ill and deaths were understated, China’s economy has come back to 80% of what it was before. But again, the 80% may be a little overstated. This recovery is slower than after the SARS epidemic a number of years ago. The official PMI rebounded in March to 52.0 from 35.7 in February. Part of China’s supply chain has also been hurt by the slowdown in the US.

Commodity prices crashed in April. Crude oil was down 50%, however the price at the pump has not fallen nearly as much as crude. Gas should now be about $1.25 to $1.50 a gallon at the pump, and that is only the case in less than 10 states, according to current AAA data. Metal prices have not dropped this much in a month since 2008. Spot prime aluminum dropped 15%, and prime aluminum scrap dropped a whopping $.10 and is now $.50 cents per pound, which hasn’t happened since January 2009. Aero chips were only down 2 cents per pound, but the price will fall with the slowdown in auto sales. Copper was down 18%, and nickel was “only” down 10%. Stainless steel prices are down 20%. Steel prices are also down over 10%. Surprisingly, the demand for most scrap commodities remains good, partially because the scrap flow has slowed down with the price drops. With many sectors of the economy slowing in April, I am looking for more pressure on the prices.

To close, I heard a cute story about a couple who have been married for a long time. While sheltering in place, they decided to help each other improve their habits. He said, “You need to embrace your mistakes.” With that, she went over to him and gave him a big hug!!!!

“If we all did the things we are capable of doing, we would literally astound ourselves.” -Thomas Edison.

I normally close with: Work Safe. Work smart. Profits will follow. In these times, I will close with:

Be well. Be safe. Life is good. Family is precious.

P.S. We have expanded our customer base to include more people at our accounts. If you do not wish to receive this monthly letter and consumer prices please respond stop. Thanks.