Shapiro Metals- July Market Insights
July 13, 2021
No Covid vaccine. 15 million people looking for work. GDP forecast down 5%. July, 2020.
What a difference a year makes. Too many people died from Covid, but we have a vaccine that works. There are still about 9 million jobs unfilled now, but most employers are complaining that they can’t hire people even at much higher wages. GDP is forecast to be up from 7% to 9% this year. But now the big fear factor is what will happen with inflation. We had to make some tradeoffs to get to where we are, but I will take these [tradeoffs] anytime over what we experienced last year.
Along with the higher GDP, the Congressional Budget Office forecasts the personal consumption expenditures [PCE] will be 2.8% in Q4. The PCE does not include the volatile food and energy prices and is what the Federal Reserve Board uses to gauge inflation. Most of the stimulus money has been sent out and there is still $2.5 trillion in additional savings out there that has not been spent. Most of the added unemployment benefits will end soon and we should see employment pick up as schools open in August and September. The infrastructure bill has been pared down significantly and will be spent over 8 to 10 years.
“You look through the current time frame and look one and two years out — we’re going to be looking at a very, very strong labor market,” Federal Reserve chairman Jerome Powell said during a recent press conference, describing an environment of low unemployment, high rates of participation, and “rising wages for people across the spectrum.” Edward Meir, president of Commodity Research Group, just reported in his monthly commentary that for its part, Bank of America said last month that elevated inflation readings can persist for another two to four years. The bank points out: “It is fascinating so many deem inflation as transitory when stimulus, economic growth, asset/commodity/housing inflation (are) deemed permanent”. The 10-year Treasury bonds are one of the best leading indicators for inflation expectations. They were up to 1.7% a few months ago and now have dropped to below 1.3%. The real money bond market agrees with the Fed and its ability to curb inflation when it sees it. Prior to Powell being Trump’s Fed chariman appointee, he was the 2012 Obama appointee to the Federal Reserve Board of Governors, and showed the ability to pivot early from incorrect courses. We will see who is correct.
The Institute Supply Management [ISM] reported the June Purchasing Managers’ Index [PMI] is down slightly but still strong at over 60. Respondent comments were generally positive, but they were accompanied by widespread worries about disrupted supply chains, rapidly rising costs for inputs, shortages of raw materials across the board, and employers having trouble filling open positions. Most of these issues are tied into employment. The Shapiro Nonferrous Scrap Metal Index for June was flat again and has been throughout Q2. Labor shortages are the root cause for this slower growth, even though the index is up 7% from pre-pandemic February, 2020.
Over 850,000 jobs were added in June. More than 22 million jobs were lost during the pandemic, and so far over 15 million people have been rehired. Still, there is demand for over 9 million new jobs, which, if filled, would put employment up 10% from pre-pandemic levels. For over 10 years, wages for lower- paid workers have been weak. Pandemic-related stressors including remaining Covid fears, children at home, family issues, and low wages are coupling with higher unemployment benefits to cause many workers not to return to work maybe not ever. Raising the pay for these people to $15 and more would cost employers a loss of margin, and prices for goods and services would increase. However, I believe this would be good for the economy, because these people tend to spend what they earn, which would stimulate the economy. Taking wages from $12 to $15 per hour is a 25% increase for employees, but it would result in a much smaller percentage increase for goods and services. Also, adding workers and bringing back production to higher levels will alleviate many of the supply chain issues while increasing profit margins.
An old adage in commodities is that the cure for high prices are higher prices. Companies will look to substitute other metals or look for lower-cost options. We may be getting near that point, but we’re not quite there yet. Prime scrap aluminum prices fell for the first time in a year but are still more than double what they were in June 2020. The scrap pipe line is starting to fill up and consumers are reducing their prices. Secondary prices have been holding steady even with the slowdown in auto sales. Copper prices fell, nickel prices held,stainless steel is stronger and steel prices continue to be steady.
China has been talking down high metal prices and attempting to reduce speculation. They announced they would release large quantities of their metal surpluses. The market easily absorbed it and the prices changed very little. The biggest news is the Russian announcement of a 15% export tax on aluminum, copper, nickel, and steel starting August 1 and running until the end of the year. Harbor Aluminum Intelligence’s view is “the tax could hike the delivery cost of Russian-origin primary aluminum by at least $400 per mton and by as much as $650 per mton (given current LME prices and P1020 premiums).” Harbor also states the Midwest premium, currently over .30 cents per pound, could move to anywhere between .46 and .58 cents per pound.
We won’t know what will happen with the Russian export tax until the end of this month but there are many scenarios. Section 232 could open up to reduce the Canadian premium. Other countries could also announce taxes on Russian goods. Russia could back off. We have seen the Midwest premium’s continued strength, as it went up 3 cents since this announcement and prime metal demand still continues to be strong.
I have attached an interesting article on the complexity of producing microchips. Each production machine costs $150 million and the manufacturer “eventually improved a system that directs pulses from a high-powered laser to hit droplets of tin 50,000 times a second.” It’s fascinating from a technology and political viewpoint and worth reading.
“Freedom is never more than one generation away from extinction. We didn’t pass it to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same.” -Ronald Reagan
Life is good. Family and health are precious. We have lots to be grateful for.
Bruce Shapiro
Comments are always welcome bruce@shapirometals.com.
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.