Bruce's Commentaries / 08.12.2021

Shapiro Metals- August Market Insights

Shapiro Metals- August Market Insights - Image

August 12, 2021 

Supply Chain Drag 

 

Even though GDP in Q2 was up 6.5%, growth continues to be held back by the supply chain. That chain is tethered to price increases, raw material shortages, labor shortages, and a surge in the Delta Covid variantHow long these factors will hold the economy back is an unknown. Despite this, demand in manufacturing and the service sector is very positive.

Covid 

Covid-19 is once again making more news thanks to the highly contagious Delta variant. Reported cases are growing at a fast pace, but fortunately, deaths are not rising nearly as fast. New cases have been concentrated in states with low vaccination rates, although vaccinations are also starting to pick up in these states. The CDC says 70% of US adults have received at least one vaccine dose and 50% are fully vaccinated. Covid deaths are stagnant because 90% those most at risk of dying — Americans aged 65 or older — have received at least one vaccine dose. 

All of us know people who are not vaccinated. There are many reasons including fear of longterm effects, no FDA approval, and “I am young and take good care of myself,” to name a few. I am datadriven and like to reference some data that Axios reported:

  • 99.923% of fully vaccinated Americans have not tested positive for COVID-19.
  • 99.996% of fully vaccinated Americans have not been hospitalized with the virus.
  • 99.999% of fully vaccinated Americans have not died of the virus.

I believe that being vaccinated is much safer for all the people I interact with and care about. 

 

Manufacturing

My favorite indicator for the manufacturing side of the economy is nondefense capital goods new orders excluding aircraft, the proxy for business investmentwhich was up .6% in June and up 10.4% for Q2 on an annualized basis. 

“The New Orders 12MMT [month moving total] will rise through at least 2023, though the pace of growth will be slower in 2022 and 2023. Despite the slower rate of growth, the New Orders 12MMT will end 2023 roughly 16% above the current level,” reports ITR Economics.

This tailwind will be beneficial for many months to come. Great news for us!

The July PMI, Purchasing Managers Index, remained positive even though it fell a little. The backlog of orders is strong, and the supply chain slump is causing inventories to fall. Even though prices of raw materials are going up, the rate of increase is slowing. 

Manufacturing job openings are double what they were prepandemic. 

  • Over 900,000 new jobs were created in July.
  • The unemployment rate dropped to 5.4%. 
  • But employment is being held back by rising childcare costs, boomers retiring at a rapid rate, and the opioid crisis preventing many workers from passing drug screening tests. 

I believe the labor shortages will improve as we move into September. Benefits are being reduced, schools are reopening, and wages are increasing. These factors bode well for manufacturing, and the sector will continue to be strong in the future. 

The Senate passed a $1 trillion infrastructure bill Tuesday with bipartisan support, and the full Congress is expected to pass it shortly. Home sales are still good but are also being held back by the supply chain drag. Lumber and other commodity prices have been falling, but metal prices certainly haven’t. Car sales are also slower due to supply chain limitations. 

Aerospace looks better as people return to flying and new plane orders increase. Aircraft production is ramping up slowly, and it will take until the middle of next year for Boeing and Airbus to work through their inventory backlogs. Consumer confidence remains very positive. Business is strong throughout Europe. The China PMI is just over 50 and positive, but it is having some trouble. 

How does all of this add up in the real world? The Shapiro Nonferrous Scrap Metal Index of manufacturers — covering auto, aero, HVAC, trailers, RV, boats, and housing — continues to be flat. The economy feels to me like being in a fast sports car when I can’t get out of second gear. 

 

Metals

The bull market in prime metals continues to charge ahead. 

  • Prime aluminum spiked to $1.53 per pound from the beginning of last month and is up 50% from the beginning of the year. 
  • LME aluminum is up over 30%, and the Midwest premium doubled. 

With the partial recovery in most economies, aluminum demand has outpaced supply and global inventories continue to fall. A major strike at the Rio Tinto Canadian plant and a crackdown on smelting in China to reduce fossil fuel consumption and emissions are also reducing the supply. 

International container shipping rates and domestic shipping rates have increased at a faster pace. The Russian 15% tariffs on exports of aluminum, copper, and nickel are also a pricing factor: This has caused the Midwest premium to increase over 10% so far this month. Harbor Intelligence has been calling for the premium to go to 40 cents per pound in Q4. Prime aluminum scrap has been going up, but not nearly as fast as the prime market prices, because consumers are now getting enough scrap and labor shortages are holding down prices. The same is true for the secondary smelters who can’t produce enough metal. Aerospace chip prices dropped 5 cents this month.  

Copper and nickel prices also rose in July, and the fundamentals in these markets remain strong. Stainless steel prices rose about 10%. Steel prices have also been very strong, even though they dropped slightly this month. HRC is rapidly approaching the $1 per pound price as the steel mills take advantage of Section 232 tariffs with record profits. That is good for the mills and bad for consumers. 

Almost all scrap metal prices have doubled since May 2020. Our philosophy is to continue to buy and sell on a monthly basis. Manufacturers have difficult decisions to make if you have not locked in your buying prices. The two opinions on this are “the trend is your friend” and “pigs get fat and hogs get slaughtered.”   

“Profit isn’t a purpose, it is a result. To have purpose means the things we do are of real value to others.”  -Simon Sinek 

 

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