Shapiro Metals Market Insights – August 2020
Published August 14
August 2020 Market Insight
Here’s a conversation many people have had in their youth, as I certainly did:
My mom: “Take your medicine.”
Me: “I don’t like it, and I don’t want to.”
My mom: “Take it now or you won’t feel better.”
Many of us are having a similar conversation about wearing a mask as a health precaution during the pandemic. History shows that there is always a tipping point when most people decide something contentious is the smart thing to do. Wearing seat belts is one example. It wasn’t until the 1980s and ‘90s that states began adopting seatbelt laws, and then public sentiment shifted from the devices being optional and uncomfortable to being a necessity.
Many situations where numerous approaches transition to one common safe practice have economic effects. The economic impact of the various approaches to our current pandemic is evident.
“The path forward for the economy is extraordinarily uncertain and will depend, in large part, on our success in keeping the virus in check,” said Federal Reserve Chairman Jerome Powell.
China shut down its economy in the first quarter and took stringent pandemic actions. Many other Asian countries did the same. Most European nations also shut their economies for about two months. All of these countries are experiencing significantly lower COVID-19 cases and deaths. Asian economies are in a V-shaped recovery, and Europe is rebounding, but at a slower rate. The Chinese Caixin index for manufacturing is now at an 11-year high.
The U.S. has taken a different approach with vastly different results. I am not advocating for shutting down the economy, rather I am advocating for taking the actions that will protect our health, the health of those around us, and help our economy recover. I wear my mask in public, practice social distancing, and wash my hands frequently. As I told my mom, “I don’t like it, and I don’t want to.” Yet, I still do it because it is the right action to take.
Headline GDP fell almost 33% in Q2, which was the frightening annualized number. Those that read further learned it was still down an incredible 9.5% from Q1. The other very ugly number is the unemployment rate, which is 10.2%. While 15 million people are unemployed, a staggering 30 million people are collecting unemployment. It is impossible to get an economy going while one out of every five Americans is not working.
Nondefense capital goods new orders, except Aircraft, were up 3.3% in June, the most recent reporting month, but they were still down 16% from pre-COVID numbers. New home sales are the strongest since July 2007 thanks to low interest rates and people wanting their own space. Oil rigs continue their downward trend even as oil is recovering. Car sales, which are now mainly truck and SUV sales, continue to sell at a better pace.
The Shapiro Nonferrous Scrap Activity Index recovered again in July. Volumes are now 10% below Q1 and up 10% from June. Automotive spiked again as manufacturers try to increase the inventories they lost during Q2. Auto inventories are at 70 days, which is 50% below where manufacturers want it. Aerospace volumes were similar to June, but the variances among manufacturers was dramatic. The July ISM manufacturing PMI was up to 54.2 from June, when it was 52.6. Of the 18 different types of manufactures that the ISM covers, 15 reported an increase in business from June. Of those, five are metals related. The three that reported a decrease in business were transportation equipment, fabricated metal products, and machinery.
The dollar suffered its worst monthly loss in 10 years, partly because COVID virus cases and deaths are still rapidly rising in the US. Interest rates are very low, and there are some expectations for inflation increases into the distant future. Many commodities are denominated in the dollar, and as the dollar gets weaker metals are getting stronger. Prime metal prices in July were substantially higher.
On August 6, President Trump reimposed a 10% tariff on Canadian primary aluminum. The Wall Street Journal editorial board noted that “97% of U.S. jobs in the aluminum industry are in downstream production or processing. The tariffs will raise costs for them as well as end-users like beer companies and auto makers.” The tariff only helps the very few remaining US primary aluminum producers, and according to CRU it will cost the US consumer $2.4 billion.
In July, the Midwest premium went up 2.5 cents to 11.5 cents in anticipation of this tariff. It is up another 2.5 cents so far in August. In April 2018, when this tariff was first imposed, the scrap prices did go up. However, the spreads also widened because the higher tariffs attracted a substantial amount of metal from foreign suppliers.
Spot prime aluminum was up 7 cents per pound from the first of July, and prime scrap was also up 7 cents. Secondary aluminum was only up 2 cents, as secondary ingot remains flat. Copper is at a high for the year due to strong Chinese demand and is up almost 50% from its April low. Nickel is also close to its yearly high, as are stainless steel prices. Scrap steel prices are the only ones that did very little this month, because the steel mills are still far below their pre-COVID capacity.
The second half of the year should show the US economy recovering. How fast this happens is up to us and the actions we take to decrease the Covid-19 virus.
“Courage is what it takes to stand up and speak. Courage is also what it takes to sit down and listen.” -Winston Churchill
Be well. Be safe. Life is good. Family is precious.
Bruce Shapiro