Shapiro Metals- June Market Insights
June 10, 2021 Market Insights
V-shaped recovery has finally arrived
Last year in Q2 there were many forecasts for a Q3 V-shaped recovery. It has taken an extra 9 months for this baby to arrive, but we are in a strong recovery now. It is being fueled by $6 trillion in savings, of which $5 trillion was funded by the government rescue programs. Close to 50% of the population has been vaccinated, and Covid-19 cases and deaths are dropping rapidly. With the start of summer and most people wanting to get outside, it is no wonder that people are feeling good. The entertainment and travel sectors are rapidly gaining momentum. All of these factors will energize the economy for years.
The downside may or may not be inflation or as I call it, just the “I word.” We will be bombarded with news about inflation when the next report comes out today. These numbers will be based on the very low and ugly Q2 2020 panic prices. The PCI will be up more than expected and “look” bad. Part of that inflation includes the price of used cars going up due to the car shortage and air travel costs making up for the pandemic lack of demand over the last year. The Fed is focusing on the PCE, personal consumption expenditures, that eliminates some of the transitory price issues.
The high unemployment rate is another anomaly. There are 7 million less people working now than in the pre-pandemic. Businesses are having trouble hiring not only fast-food restaurant workers but also manufacturing and middle management people. As more people are vaccinated and we get into September, when children go back to school and supplemental benefits run out, more people will be joining the workforce. These will be higher paying jobs and the people getting these jobs will be spending that money. In addition, we still have that excess $6 trillion in savings that will be fueling this economy.
I believe the transitory spikes in prices will cause some inflation and get us to 2 percent plus by the end of the year. One of the core reasons for inflation in the 1970’s was the inflation psychology that caused consumers to buy goods and durable goods today because the prices would be higher tomorrow. Consumers were outraged when the price of gas “skyrocketed” from $.36 in 1970 to $.75 in 1978. Eventually inflation was brought under control with 20% interest rates and a horrible recession.
“We aren’t obviously on the way to a very high and persistent inflation outcome,” said Brian Sack, director of global economics at the hedge fund D.E. Shaw and a former senior Federal Reserve official. “But we’re at an inflection point, in that the rise in inflation expectations to date has been a policy success, but a rise from here could become a policy problem”.
The manufacturing world continues to look great now and into 2023. Nondefense capital goods new orders excluding aircraft, were up 2.3% in April. Business and consumer confidence is positive. ISM was strong again in May. Gains were broad-based, with sixteen of eighteen industries reporting growth. New orders index jumped to 67.0 and new export orders notching a gain as well. Durable goods were slower due to the same production issues with disrupted supply chains, rapidly rising costs for inputs, shortages of raw materials across the board, and employers having trouble filling open positions. These issues have all come together to keep production from rising quickly enough to meet the explosion of demand as the US economy reopens. The good news is that manufacturing activity should remain robust for the foreseeable future to clear this order backlog. The May Shapiro Nonferrous Scrap Activity Index was up 5% from April. There continues to be lots of variations in these volumes even in similar sectors.
The Chinese PMI has been just above 50 now for months. Exports have been strong and the domestic market is average. The spike in metal prices and the highest prices in history for many metals has caused the government to threaten companies not to raise and collude on prices. When this announcement was made in the middle of May, some of the metals did go down. But now many have recovered and are still near highs. Trying to control metal prices and commodities is nearly impossible. Some of the increase in prices may have been due to inventories growing higher in the recent months of continuous upward prices. As I said last month, “correction happens.” I feel good about that analogy as Elon Musk just tweeted on chip shortage that “Fear of running out is causing every company to overorder – like the toilet paper shortage, but at epic scale.” He added it shouldn’t be a long-term problem. Some Chinese companies will take the threats to heart and reduce their high inventories, but I don’t think it will materially affect the prices. The other issue with trying to control prices is supply and demand. With the worldwide economies growing and expanding, I don’t see the Chinese policy succeeding.
Prime aluminum got to a high of $1.45 before falling to a low of $1.33. It was $1.38 on June 1. The Midwest premium is at $.27. The demand in general for prime scrap remains strong, while June prices are spotty with some up a little and some down. Secondary grades fell for the first time in a year. Auto demand is slower with the chip shortage and other parts shortages. The Japanese plant that is a major supplier of auto chips and had a fire last year is coming back online and should be at full capacity mid-June. GM just announced the start up of more plants. Other auto makers should follow suit. Copper and nickel are higher now and had the same early May spike followed by lower prices and a recovery. They all finished higher than last month. Ferrous prices are bat shit crazy. A year ago, iron ore prices were close to $50 per ton. They just reached $230 per ton. HRC is over $.80. The US steel mills are running at a high of 80% capacity. Great news if you are a steel mill but bad news for manufacturers. The Chinese HRC price is $.355, which gives them a very strong competitive advantage. The Coalition of American Metal Manufactures and Users has been attempting to get Section 232 tariffs reduced. We do need a strong steel industry, but something is not right.
“Education is not the learning of facts, but the training of the mind to think”. -Albert Einstein
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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.