Bruce's Commentaries / 03.09.2021

Shapiro Metals- March Market Insights

Shapiro Metals- March Market Insights - Image

March 10, 2021

New Economics Part II

It has been about a year since we started to learn about this new so-called “flu,” Covid-19. Expert opinions about it ranged wildly from it ending by April 2020 to recommendations not to wear a mask to recommendations in favor of wearing a mask and claims that the illness was just a flu. Other healthcare officials made the “unbelievable” forecast that there would be 250,000 deaths by the fall and it would take many years to develop a vaccine. We now know the sad fact that 500,000 Americans, and over 2.5 million people worldwide, have died from Covid-19. Fortunately, vaccines have been developed and are now saving millions of lives, and enough of them should be available by the summer to vaccinate every American who wants a shot. Eventually, we will live more “normal” lives.

In January, Congress approved another $900 billion in relief for the 10 million people out of work and for businesses still reeling from the pandemic. The next stimulus bill, worth $1.9 trillion, passed the Senate this past weekend and is expected to be on President Biden’s desk this week.  Federal Reserve members indicate that we need this large amount of stimulus to get back on track for a healthy economy, especially to accomplish this in the near future.

“The economy is a long way from our employment and inflation goals,” Federal Reserve Chair Jerome Powell said in testimony to the Senate Banking Committee, a statement he has repeated often. Most members of the Federal Reserve Board are making similar statements on a regular basis, as has Janet Yellen, Secretary of the Treasury, and former vice chairman of the FRB. Powell said recently that inflation could be somewhat volatile over the next year and might rise due to a potential burst of spending as the economy strengthens. But that, he said, would be a “good problem to have” in a world where economic and demographic forces have been pulling inflation down for a quarter of a century. “Inflation dynamics do change over time but they don’t change on a dime, and so we don’t really see how a burst of fiscal support or spending that doesn’t last for many years would actually change those inflation dynamics,” he said.

The government finances our debt by selling bonds to investors and other countries who view the US as a safe haven for their wealth. These people and countries are risk averse investors. Interest rates are the true reflection of whether the current inflation rates are believable. Our short term 2-year treasury bond yields have remained below .20% for a long time. The 10-year bond yields have recently started to rise but are still trading around 1.5% yield. Economists call this “steepening of the yield curve,” with long-term rates rising as short-term rates hold steady. The smart money sees faster economic growth with not much inflation. Otherwise, the longer-term rates would be going up much faster.

Almost all the economic data I read is very positive, which is excellent for most of the economy and manufacturers. Even oil is beginning to look better. The February ISM is the highest it has been since 2004. The main issues now are supply chain and raw material prices. The two main lead indicators, new orders and production capacity, are higher again. Inventories are low and back orders are stronger. The Shapiro Nonferrous Scrap Metal Activity Index for February was virtually the same as January. Considering we lost almost three production days due to weather, it was a good month.

January’s seasonally adjusted personal income was up 10%.  The January personal savings rate was over 20%, the highest since WWII, thanks to the $900 billion aid and reduced travel and entertainment spending. Much of that money will be spent this year along with the additional $1.9 trillion in aid. It is no wonder the GDP forecasts for this year range from 4.5% to 7% growth.

Metal prices continue to skyrocket. Almost all metals are at, near, or above recent yearly highs. The above-mentioned growth is highly anticipated for metals both domestically and worldwide following the pandemic slowdown. And then there are the hedge funds and speculators that believe there will be lots of inflation and metals are a great hedge against that. I remember being at the Southwood metal commodities meeting in March 2008 when one of the analysts from the UK mentioned that he was watching a cable ad for “how you can profit from the commodity boom.” He commented: “Every time I have seen ads like this for how the public can profit, I know it is time to sell, EXCEPT not this time.” A few months later commodities did crash and hit bottom in March 2009, down 70% from the peak values. Our strategy continues to be to turn metal frequently and hedge our open inventory.

Spring 2018 was the last time aluminum was this high, when the US and the rest of the world put an embargo on Russian metal due to unscrupulous trading by a Russian oligarch. We will see what happens with this current run up. Prior to that it had been 10 years since aluminum and copper hit these levels. Aluminum is tight In part because there are trade restrictions on China and newly announced anti-dumping restrictions on other foreign producers. The section 232 tariffs are not ending, either. With that tightness, the Midwest premium has continued to rise above 16 cents per pound and there are predictions it will go to 19 cents. If that happens, more metal may be attracted to the US and we could see some stability. Otherwise, continued strong aluminum demand from building and construction, transportation, and packaging will keep the supply tight. This is generally the same scenario for most of the other metals.

As you can see from the enclosed price list, all the metal prices we track are up in March.Most aluminum scrap prices are up close to 10%, while copper is up over 15% and is on a roller coaster ride. Nickel is up 4%, along with stainless steel prices. The ferrous market continues its nearly 8-month run, and HRC just keeps getting stronger. I am not sure where this ends or when it slows down, but a wise man once told me “the trend is your friend.” Fortunately, for most of our businesses, excluding aerospace, this year looks like it will be a good one, barring some other black swans.

“Companies that create climates in which every employee is focused on serving customer better are going to be winners.” -John Humphrey

Life is good. Family and health are precious.

This report was prepared by Bruce Shapiro and reflects my current opinion of the economy. It is based on sources and data I believe to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice.

Comments are always welcome bruce@shapirometals.com