Bruce's Commentaries / 05.18.2020

Shapiro Metals Market Insight – May 2020

Shapiro Metals Market Insight – May 2020 - Image

Published May 18, 2020

The health crisis continues unabatedly. Last month at this time, I reported 24,000 deaths in the U.S. We are now over 84,000, and worldwide the number is over 294,000. The pain and sadness that afflicts us from these losses is relentless. This disease will be with us for a long time, and it takes both an emotional and financial toll.

This is “the new abnormal.” In addition, the velocity of change is dauntingly adverse. We are all aware of the onslaught of bad financial news, most of which is prefaced with the phrases “unprecedented,” “record lows,” “worst in many years,” “devastating,” and “incredibly terrible.” These modifiers accurately describe all the economic indicators I normally review, including unemployment, GDP, durable goods, industrial production, ISM, car and home sales, oil prices, and every other indicator.

The Shapiro Nonferrous Scrap Activity Index was down 40% in April, which is what we forecasted. Automotive volume was down 95%. Most auto plants are starting up now and will be producing at about 40% capacity for May and higher in June. Auto sales were down 50% in April but started coming back late in the month. Some new sales are due to people avoiding the close quarters of public transportation to prevent possible Covid-19 infection. Aerospace manufacturing was down in April, but there is some hope for the future with Boeing announcing it would ramp up 737 Max production.

Positive news about future financial expectations is underreported. Prior to Covid-19, the economy was strong. Consumer debt was lower and therefore the banks are sound. The federal government stimulus plan has put $3 trillion into the economy so far — about 15% of GDP — and there is more to come. In 2009, it took the stimulus about 3 months to impact the economy. Hopefully in June and July we will see economic improvement. Of course, that assumes people get out of their homes, feel safe, and start working and buying again. The recovery will be very spotty, with parts of it moving forward and others lagging, but it will still be a move in the right direction. Also, upcoming changes in supply chains will be positive. Manufacturers will reduce outsourcing and more manufacturing will move back to the U.S. and North America.

Q2 will be ugly. Very ugly. Hopefully we get most of the bad news out of the way and start our recovery in the second half of the year. What kind of recovery is anyone’s guess. Pick whatever scenario you can dream of and you can find an “expert” who agrees with you. I heard one person put it this way: There is a 25% chance we will have a very bad recession or depression, 50% chance we will muddle through this, and 25% chance we will have a medical solution [miracle] and a V recovery.

China’s average production went back up to 85% of what it was before Covid-19. Their PMI dropped from 52 in March to 50.8 in April, and the Caixin went from 50.1 to 49.4. Even though they are recovering, they expect unemployment to be 30 million people this year versus 20 million in 2009; for reference, there are 1.4 billion people in China. April car sales in China were up 4.4% year-over-year. The strength was partially due to a rebound from the shutdown in the previous months. Car sales this year are forecast to be down 20% from last year.

Metal prices for April were strange. Aluminum fell once again, making new lows. The LME and Midwest premiums are now below 8 cents per pound. Q1 worldwide aluminum production was up 2.7% year-over-year, and consumption was down 8.6%. An estimated 30% to 50% of prime aluminum producers are losing money. CRU forecasts a whopping 6 million ton surplus this year. In spite of the 2.5-cent drop in the spot prime price, prime scrap prices dropped less than that. All scrap prices are being impacted by lower volumes due to slower manufacturing and fewer people picking up scrap because of shelter in place rules. Even though the heavily automotive dependent secondary aluminum smelters were significantly slower, aero chips dropped only 2 cents. Copper rebounded with lower supplies and higher Chinese consumption, and nickel rose for the same reasons. Stainless steel prices were also up a few cents. Steel mills saw their capacity drop from 80% at the beginning of the year to less than 50% in April. Again, due to much lower scrap supply, prices went up in May. As always, I have attached the consumer buying prices for this year and previous years.

Last month Jerome Powell, chairman of the Federal Reserve Board, recently summarized the situation: “I don’t think anybody knows how long [the Covid-19 economic impact] will be. I do know the U.S. economy is strong and we will get through this.” This week in his address to congress he warned the path ahead as far as the economy is concerned is “both highly uncertain and subject to significant downside risks.”

“You can never cross the ocean until you have the courage to lose sight of the shore.” -Christopher Columbus

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