Bruce's Commentaries / 11.17.2020

Shapiro Metals Market Insight – November 2020

Shapiro Metals Market Insight – November 2020 - Image

“You can’t always get what you want. But if you try sometimes, you might find you get what you need.”

As you can tell from my music quotes, I am usually stuck in the late 1960s. With all the social and political tension this year, sometimes it feels like I am re-living the late 1960s, too. Leave it to the Rolling Stones to provide this timeless, pragmatic reminder that everything will work out as it should in the end.

The record voter turnout – the highest percentage since 1900 — brought with it a new president, while also increasing Republican seats in the House. The Senate  currently has 50 Republican and 48 Democratic senators. The two remaining seats from Georgia will not be known until that state’s January 5 runoff election occurs, at which point we will also learn which party controls the Senate. 

Greg Ip wrote in The Wall Street Journal: “The election looks like it may yield a dream scenario for business: a moderate Democratic president whose more aggressive plans can’t pass the Senate, but who eschews the unpredictability that has often marked the Trump administration.” I have predictions on what could happen, assuming Republicans maintain control of the Senate. There will be no tax increases, trade relations will improve with our allies, and there will be serious trade negotiations with China. Science-based climate and energy policies will focus on reducing greenhouse gases, and the US will re-join the Paris Climate Accord. The conservative Supreme Court judges and federal judges will make their appropriate rulings. The federal government will be more proactive with its pandemic policy. Hopefully a stimulus package will get enacted before year end, and it should be less expansionary with Republicans still in control. That would be a boon to metals manufacturers if the stimulus includes an infrastructure package.

There is a lot of great economic news to report. However, most of our optimism must be tempered with the reality of the pandemic. Cases continue to grow at an alarming rate in the US, with over 10 million people infected and 213,000 lives lost. Cases are also growing again around the world, except for in Asia. With cold weather and the holidays coming up, the numbers could easily continue to grow. Hospitals are setting records for the number of people being treated, and our ability to treat both Covid patients and normal illnesses is under stress. Fortunately, the percentage of people dying is going down, but it is still too much. Until the pandemic is under control we will continue to suffer physically and financially. As Federal Reserve Chair Jerome Powell says: “The path of the economy will depend significantly on the course of the virus.” He added on Thursday that “[t]he next few months could be challenging.”

The best news is that Pfizer announced success with trials of their vaccine, which has a 90% effective rate. Shots for high-risk medical workers will hopefully start this year. The rest of us it will not have access to the vaccine until at least spring. Another glimmer of hope is that other companies should also have their vaccines tested and ready soon.  

Most of the key metals manufacturing indicators I follow have been very good. Because there are still 20 million people collecting unemployment benefits, in addition to the effects of the Q2 stimulus package, spending has increased. Never mind that the budget deficit for the last fiscal year, ending September 30, tripled because of the stimulus and lower tax collections. Business and investment spending  and durable goods, excluding aircraft, continue their upward trend. Housing and automotive spending is also strong. Household consumption was up 6.9% in Q3 vs Q2 and up 3.6% from Q3 last year. The money that hasn’t been spent on food and entertainment has been going into upgraded vehicles and household items, and manufacturers have had a difficult time keeping up with demand for durable goods. The ISM shot up to 59.3 from 55.4 last month. Almost all segments were strong except for oil. And unemployment rates keep dropping as more jobs are created.

The Chinese economy continues to be strong, too. Covid is under control there and throughout most of Asia, excluding India. Pent-up Chinese consumer demand is helping their economy. Europe also had a strong October, but it is now slowing due to a Covid resurgence. The combined JP Morgan Global PMI was also up and at the fastest pace in 2.5 years.  

The Shapiro Nonferrous Scrap Metal Index of our top 50 manufacturing accounts dropped slightly in October from the record high in September. Automotive continues to be strong while most of the other segments are steady. My expectations for the balance of the year are that business will be down slightly.  

Edward Meir forecast last month about what might happen after the election, considering the markets were fairly close. The equity markets rallied 7.3% the week of the election with the favorable odds of a Biden presidency. The commodity markets have also gone up, although Meir anticipated that base metals might be stagnant. Much of the current upswing in metals is due to Pfizer’s vaccine news and anticipation of a return to normalcy in the near future.   

Spot prime aluminum returned to its high, set in September. Scrap is still in tight supply and the spreads are closer to prime, which gives you an advantage. Prime scrap prices were up about 3 cents from last month and the highest they have been in 14 months. Section 232 policy is another tariff that could change with a new administration. After Trump changed the 232 ruling for Canada in October, the Midwest premium dropped from 16 cents to about .125 cents now. Secondary prices are also the highest they have been in two years; automotive is fueling this rise. Copper prices are making multi-year highs now. Nickel is also strong, although the price of stainless has fallen on a decrease in US mill demand. Steel prices for November are about the same. The price for HRC has gone from $500 a ton three months ago to a high of $7250 now. Section 232 has been good for the mills.

China will be the only major economy to have a positive GDP this year and their demand is a main factor in driving up all commodity prices. The virus started there last year and they were able to control it by the end of Q1 this year, so they experienced a V-shaped recovery. China has had strong demand for primary aluminum as its economy keeps growing, but the worldwide demand for aluminum is down almost 17% this year.  Strong Chinese demand also is the reason copper is making new multi-year highs. Once the rest of the world controls the virus, we should experience similar results. However, it is taking us much longer. 

November is a month when we celebrate Veterans Day and Thanksgiving. Without the sacrifices of so many veterans, we would not be able to have our freedom. When I celebrate this Thanksgiving under unusual circumstances, I will be thinking about how many soldiers sacrificed their Thanksgivings and their lives for us. I believe this country can come together by listening and understanding each other, finding common ground, building trust, and working together for the betterment of all — The American Dream.

Life is good. Family and health are precious.