Shapiro Metals- November Market Insights
Supply chain shocks are the new sonic booms
Starting in 1947 and lasting until 1973, the Air Force tested new, faster planes that broke the sound barrier when they traveled at speeds faster than 750 miles per hour. When they did this, air shock waves created loud booms that sounded like explosions at random times. By the time you heard the boom, the plane was long gone. It was fun to hear as a kid but very annoying to adults. Last year, Covid-19 set off a series of disruptive events that I liken to sonic booms.
Supply Chain
The pandemic sent shock waves throughout the supply chain, and that has been exacerbated by climate change and geopolitics. The supply chain is set to go at a certain speed: Just-in-time delivery and globalization resulted in a very efficient and effective system until it got shocked. But once it did get shocked, we learned that the supply chain is very taught and could not be effectively and quickly changed. Overseas shipping is a prime example of this massive disruption. Ships and containers have jammed West Coast ports for months. There is only so much capacity to unload and move these containers even though Long Beach port’s unloading hours increased to 24/7. There is still a shortage of trucks, drivers, chassis, and warehouses despite freight rates rising from about $1,600 per container to a peak of $20,000. The shock waves will continue throughout the system for some time as we see an end to an infinite supply of low-cost goods with quick deliveries.
Covid
GDP in Q3 dropped to 2% from 6.5% in Q1. The slowdown was due mainly to supply constraints and the Covid Delta variant resurgence. Well over 700,000 US citizens have died from Covid-19, and 5 million have died worldwide. More people in the US have been vaccinated than in other countries, and that trend likely will continue with the new OSHA vaccination requirement for companies with over 100 employees. Another piece of great news is the new oral drug from Pfizer that was just approved and can reduce deaths from severe cases.
Manufacturing
Groundhog Day continues. The Institute for Supply Management index continues to be very strong but was down slightly from September. The same problems continue: labor shortages, supply deficits, and logistics. Manufacturing is one of the worst hit sectors in the ongoing labor shortage, with job openings twice what they were pre-pandemic. ISM also reported that the supplier deliveries index rose for the second month in a row (signaling longer wait times) and now sits just below May’s reading, which was the highest since 1979.
US nondefense capital goods new orders (excluding aircraft), the proxy for business investment, continued their strong ascent in September, up 1.4%. In the 12 months through August, new orders totaled a record $879.4 billion, 13.4% above the level a year ago. Annual sales for light vehicles through September totaled 13.5 million; the annual rate of vehicle sales dropped 61.6% in Q3. Fewer computer chips available for auto manufacturing results in fewer sales. US civilian aircraft equipment production has been improving and the 12-month moving average in September was 9.4% above the level a year ago. The Shapiro Nonferrous Scrap Metal Index that covers manufacturers of light vehicles, aerospace, HVAC, recreation, ship and boat building, housing, trailers, and other industries across the country was up 7% in October compared with September. Few industries were consistent, but aerospace was mainly up.
Inflation
On October 22, 2021, Fed Chair Jerome Powell said something we have known for a long time: “Supply-side constraints have gotten worse. The risks are clearly now to longer and more-persistent bottlenecks, and thus to higher inflation.” A week later he said: “Our tools cannot ease supply constraints. Like most forecasters, we continue to believe that our dynamic economy will adjust to the supply and demand imbalances, and that, as it does, inflation will decline to levels much closer to our 2 percent longer-run goal.” The Fed’s preferred inflation gauge, the personal consumption expenditures price index, rose 4.4% in September from the previous year, the fastest pace since 1991. Excluding the volatile food and energy sectors, it is 3.6% over the previous year.
Meanwhile, unemployment dropped to 4.6% as jobs increased by 531,000 in October. Total hours worked rose 0.2% in October and 4.2% in the past year. Combining hourly pay and the number of hours worked, total worker pay (excluding irregular bonuses) has increased 9.2% in the past year and 6.8% since February 2020. This is important because it means that the growth in total worker pay is outstripping inflation. Powell does not want to say anything like that about inflation, but it is still good news for consumers and the economy.
Metals
China is the world’s largest consumer and producer of steel, aluminum, and many other metals. It is also one of the largest polluters in the world, in no small part because its main energy source is coal. China is trying to reduce its pollution, especially with the winter Olympics approaching. It has mandated production cut-backs in the energy intensive metals industry, including 4% for aluminum, as well as steel, magnesium, and silicon cuts. China is also facing a crisis in energy because coal prices have been skyrocketing. That’s due to China’s trade war with Australia and its curtailment as a coal supplier. As part of the trickle-down effect, the price of energy intensive metals also has gone up. The government has threatened coal producers, telling them to quit manipulating the coal market and reduce prices “or else.” This had an immediate impact and prices tumbled, completely disrupting the coal market. It’s interesting what an autocratic authoritarian government can do. China is also facing a real estate bubble with many large companies encountering serious debt issues. Their economy and metal production are very dependent on construction, so if real estate business reduces, we will see metal prices fall.
Aluminum is a unique commodity caught up in the climate change paradox: You need aluminum to solve climate change, but unfortunately, I have learned that it is the most energy intensive and consequently, polluting — metal to produce. Ouch! It makes me feel like when I was in high school and I heard my girlfriend was cheating on me: “Say it ain’t so.” Fortunately, recycled aluminum only consumes 5% of the energy as producing prime. Plus, the light-weighted aluminum used in cars reduces auto energy consumption. Whew!
Prime aluminum has had a very crazy ride this year and this month. In mid-October, it hit $3.232 per mt on the LME and 35 cents per pound for the Midwest premium, which put the spot prime aluminum price at $1.76 per pound. By the beginning of November, it had fallen to $1.55; as of November 5, it was $1.44. The LME price has been falling with China’s coal prices and the slowdown in the Chinese economy. as iIts PMI fell again in October and is in a contraction phase. The US lifted Section 232 tariffs on aluminum from Europe, and year end demand for aluminum reduced. The Platts Midwest premium is now less than .29.
Prime aluminum scrap prices did not rise as fast as the prime market did, and they are not coming down as fast either. Secondary scrap was up slightly in November even though auto sales were down. Copper and nickel prices remain strong, and stainless prices also were up. US steel production is still strong, and HRC is below its peak but not by much. With the reduction in EU tariffs, Section 232 will not have much of an impact. The EU needs its own metal and the price of natural gas is over six times higher than it is here. Even though Chinese steel prices are dropping, the US market has not been affected because of the tariffs with China. Scrap steel in November is up $20 per ton.
The best and most accurate metals forecaster I know, Edward Meir, offers this explanation for the current metal prices:. “Our favorite explanation for most commodity declines is one that has stood the test of time; that has to do with the notion that commodity prices tend to come down much faster than they when go up, often for no apparent reason.”
At this time of year, I am particularly grateful to all of you for trusting us and working with us. I give thanks to all of you.
“What I love about Thanksgiving is that it’s purely about getting together with friends or family and enjoying food. It’s really for everybody, and it doesn’t matter where you are from.” Daniel Humm.
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.