Shapiro Metals Market Insight – June 2020

Published June 12, 2020

“There’s something happening here. What it is ain’t exactly clear.”

Buffalo Springfield wrote these words to the song “For What It’s Worth” in 1966, yet the words still hold true today, more than 50 years later. Some of the issues we now face are the pandemic, social unrest, unemployment, economic recovery, education, trade conflicts, and health issues, just to name a few. We get a non-stop barrage of daily news about all of these subjects. It isn’t exactly clear, and no one really knows what is going to happen.

Covid-19 cases in the US have topped 2 million. Over 500,000 people have recovered, and over 113,000 have died. The news that fewer people are dying is “good” news, but concerning facts and fears about the pandemic remain. Yet, even the facts keep changing. Dr. Fauci said in the beginning of March that wearing a mask is not 100% protection from getting the virus. Soon afterward, he followed the CDC’s change of tack and recommended people wear a mask in public to prevent the disease’s spread. Likewise, the World Health Organization said earlier this week that it was very rare for asymptomatic people to spread Covid-19, but then it walked back that statement the very next day. Dr. Fauci also disputed the WHO’s initial claim and said about 25-45% of people are asymptomatic and can still spread the disease. This is just the latest example of the uncertainty surrounding the situation due to new data constantly emerging, and how it can also change in a heartbeat. When will the vaccine be available? How many doses will it take for us to be protected? Will there be a second wave, and when might it happen? It isn’t exactly clear.

I am not reviewing most of the economic indicators I usually do. My economic term is that they all suck[KP1] . There are a few that I believe are worthwhile to learn more about because they will impact all of us. When I read that the May unemployment rate dropped to 13.3%, I thought, are you kidding me? The headlines have said that close to 40 million people have filed for unemployment in the last 10 weeks. It took the US 10 years to add 10 million jobs and then in 10 weeks we lost 20 million jobs. There were 5 million people that were furloughed and started collecting unemployment because many unemployment restrictions were waived in April and May. Also, 10.7 million self-employed and gig workers that got Pandemic Unemployment Assistance were classified as something other than unemployed [whatever that means]. Also, the [KP2] National Federation of Independent Business reported that 73% of the small businesses that got the Paycheck Protection Program aid retained or rehired their workers. The bottom line is that many of the laid-off workers are now being rehired, while a still larger number are losing their jobs.

I have followed the ISM Purchasing Manager Index for a long time. It was up to 43.1 in May, compared with April’s 41.5; that is still in contraction. I took a deeper dive into this and learned that the 18 different manufacturing industries surveyed are asked if their business is expanding or contracting. It is not a percentage-based analysis. It is just an average of whether your business is stronger or weaker this month. The seven metal-related manufacturing sectors all were down sharply: transportation, prime metals, oil and coal, fabricated metal products, machinery, miscellaneous manufacturing, and electrical products.

With that in mind, it is no surprise that the Shapiro Nonferrous Scrap Activity Index was down the same 40% in May as it was in April. Aerospace was down 20% from April and is down 38% from Q1. Automotive rebounded from zero in April to 20% of what it was in Q1. The May forecast indicated auto startups were delayed due to supply chain issues, especially from the Mexico supply chain. The auto industry is now forecasting sales of 12.7 million vehicles, down from the 17 million pace at which it has been running for a number of years. Since there has been very little auto production in the last 10 weeks and the dealer car inventory is very low, we could see auto production get back to near Q1 production to catch up, assuming we don’t have another severe wave of the virus and another shutdown. I am now anticipating a slow, bumpy increase in June manufacturing as companies return to work, particularly from auto and HVAC, and in Mexico.

China has stopped forecasting its growth for the first time in 20 years due to the pandemic uncertainty. The reports from China are that 80% of the factories are running at 80% capacity of the pre-Covid period. The May PMI is 50.6, down slightly from April. There are also issues with their exports due to the worldwide forecast of a 6% contraction. To combat those issues, China has increased its spending on infrastructure, defense, and environment. Meanwhile, the rest of the world is also facing the same economic problems plus the Covid issues.

Metal prices remained about the same as April. With the contraction in manufacturing and the sheltering in place, the volume of scrap was reduced and balanced out the lower demand for finished goods. As always, the Consumer Buying Prices are attached. Recently, all metal prices have been picking up, mainly due to Chinese demand. The Shanghai prime aluminum inventories have been substantially reduced while the LME inventories are going up. China is predicted to produce 2% more aluminum this year than last. Global demand is down 12% year-over-year in April and down 9% from Q1, therefore there is a good chance of a worldwide aluminum surplus. There is also talk of the US putting a “hard quota” on aluminum, which if put into effect, could bump up the Midwest premium another 6 to 8 cents. Copper prices have also been going up based on the fundamentals. US steel mills are only operating at 54% capacity. HRC hit a recent 2-month high of $510 per ton.

The Organization for Economic Co-operation and Development [OECD] forecasts a 6% global economic contraction. Its US forecast for GDP [KP3] is down 6% to 7% for the year. Both forecasts do not include a second pandemic wave. Ugh! McKinsey & Company’s most likely scenario is that a second Covid wave will occur, which would lead to a slow, long-term, bumpy growth rate along with a muted world recovery. Many economists think it will take us 10 years to fully recover.

For those that care to read it, I have attached my personal opinion on the murder of George Floyd, social injustice, and racism. Why should I include a commentary on social justice with the market insights? Because it affects our economy, our businesses, our coworkers, our family and friends, and our everyday lives. I am passionate about the cause and I hope you take a few moments to ready my thoughts.

“We make a living by what we get, but we make a life by what we give.” -Winston Churchill

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