Shapiro Metals- February Market Insights

If it bleeds, it leads. 

Bad news is everywhere. The issues we face continue to be high Covid levels, labor shortages, volatility, surging inflation, and supply chain and logistics issues. Many families also face the daily stress of educating their children and taking care of family members. The stock market has corrected by 10% and consumer confidence dropped.

Despite all the “bad” news, the economy is still very strong, unemployment is low, wages are higher, and most people had record gains in the stock market last year. Outside of Covid, last year was a much better financial year for most people and a better year for manufacturing companies. This economy will continue to be fueled by an enormous amount of savings [primarily due to the government stimulus] and pent up demand for goods and services that will be growing for quite a few years.
Inflation 

• The CPI (consumer price index) shows inflation is higher again, at 7.2%. According to economics commentator Matt Klein, “No matter how you slice the data, much of the unwelcome inflation we’ve experienced can be attributed to a handful of categories that have experienced idiosyncratic supply problems: cars, oil, and meat. These components together explain almost 70% of the excessive increase in the CPI.” As supply chain issues improve, these core CPI components’ prices should also begin to decelerate.
• The PCE (personal consumption expenditures), the Fed’s preferred gauge of inflation, accelerated to 5.9% year-over-year, the highest reading since 1982.
• Wages rose 0.7% as companies continue to raise pay to attract talent amid labor shortages.

COVID-19 and Employment 

Covid cases are still extremely high and cause disruptions to families and businesses, even though Omicron is peaking in parts of the country. No one seems to be working with a full crew. Vaccinations have reduced the number of deaths, but the numbers are still staggering: More than 900,000 people have died, and over 2,000 people a day continue to die.

Close to 500,000 new jobs were created in January as the unemployment rate crept up to 4%. Unfortunately, the surge in Omicron caused an estimated 5 million people to miss some work in January, compared to 1.7 million in December. Omicron continues to slow the economy down and affect consumer confidence, as does inflation. January consumer confidence levels were almost even with those in April 2020, when sentiment bottomed out following the first major restrictions to control the pandemic. The financial conditions today are 180 degrees better now than then. How quickly we forget.

Manufacturing 

Shipments of “core” non-defense capital goods minus aircraft (a key input for business investment in the calculation of GDP) rose 1.3% in December. In the fourth quarter, these shipments rose at an 8.6% annualized rate versus the Q3 average. ITR is forecasting continued growth through 2024, with 2023 being the weakest of the next three years for core capital goods. They also forecast the same for industrial production. Housing is generally strong, but the supply is still hampered by supply chain shortages. GM is forecasting a 25% to 30% increase in auto production, with most of that happening in the second half of the year. That would put the volumes at pre-pandemic norms. Aerospace production looks slightly better but was also very spotty.

Timothy R. Fiore, Chair of the Institute for Supply Management’s Manufacturing Business Survey Committee, reports: “The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment, but January was the third straight month with indications of improvements in labor resources and supplier delivery performance.”

• The ISM PMI was down slightly in January but still positive at 57.6.
• Inventories continue to shrink, but at a slower rate. The price index rose to 76.1 from 68.2 last month. The peak was 92.1 in June.

• Metal prices are still getting stronger. I have more on metal forecasts below, but the Shapiro Nonferrous Scrap Activity Index for January was down 10% from December. That is not unusual considering Covid and is typical for the start of the year.

China 

Although China’s economy grew at an impressive 8.1% in 2021, it slowed down to near 4% at year-end. China has been focusing on zero tolerance for Covid and a reduction in pollution. The housing bubble continues to be a major concern and is slowing the economy. With those factors in mind, forecasts for 2022 growth are between 4% and 5%. The official PMI and Caixin came in at the 50% mark, which is neutral.

Worldwide growth is forecast for about 4% this year, reflecting a continued recovery from Covid. No one seems to know if and when the next variant might strike and if it could cause additional volatility.

Metals

This is my favorite time of the year as forecasters present their predictions on where metal prices will go. I subscribe to the forecasts and analyses of Edward Meir at ED&F Man and Jorge Vazquez from Harbor. I have followed both for well over 10 years and greatly respect their research, analysis, and opinions.

I found it fascinating to see the variables and the process that Edward Meir used. This is the outline, to give you an idea of what it takes to make these forecasts. It also takes a lot of chutzpah!

• Bullish Variable #1: Low stocks and deficits to extend into 2022

• Bullish Variable #2: Shipping issues to persist
• Bullish Variable #3: COVID will likely still be with us
• Bullish Variable #4: Chip shortages are a “neutral” as the jury is out about whether lost auto demand gets replaced in 2022
• Bullish Variable #5: Although slowing, the global growth picture will still be constructive

• Bullish Variable #6: The pressure to produce more “green metal” will add another layer of costs
• Bearish Variable #1: China’s property outlook
• Bearish Variable #2: China’s macro outlook
• Bearish Variable #3: Rising inflation and interest rates
• Bearish Variable #4: Ukraine, bullish in the event of an invasion, then bearish

For 2022’s aluminum average in dollars per metric ton on the LME, Edward Meir is forecasting $2,750, with a high of $3,750 and a low of $2,300. Harbor has an average of $2,350 [base case scenario 60% chance] and $2,910 [bullish case 30% chance]. CRU is forecasting $2,863. Many other forecasters are right in that $2,800 to $2,900 range. Goldman Sachs has been talking about the commodity super cycle and has a recently updated $3,250 average. That does not include its forecast on February 8 for a $4000 LME in the next 12 months plus yesterday LME was higher than it has been since 2008.  Yikes. The Reuters poll for 2022 averages is $9,370 for copper and $19,920 for nickel. My opinion about playing the markets is DON’T. I learned that the hard way a few times. As investor and entrepreneur Ray Dalio says, “Pain + Reflection = Progress.” At Shapiro, we buy and sell most metals back-to-back and hedge the rest. Progress.

Prime aluminum soared in January and PMTA rose a little above the October 2021 high. This 20 cents per pound increase was a combination of LME going up $225 per metric ton and the Midwest premium up about 10 cents per pound. Prime scrap prices also accelerated to their highest levels ever as various grades rose 8 to 10 cents per pound.

The main reasons for the rises are energy, inventory stocks, and geopolitical issues. About 4 million tons of capacity have been closed or mothballed globally. Aluminum stockpiles in warehouses have shrunk to their lowest level since 2007, and traders fear further supply disruptions if a conflict breaks out over Ukraine.

Energy can account for up to half the cost of making aluminum, which is why traders nicknamed the commodity “congealed electricity.” With the cost of natural gas quadrupling in a year, many European aluminum producers have recently taken offline about 810,000 tons in annual production capacity. Once that happens, it generally takes two years to bring production back online.  About 4 million tons of capacity have already been curtailed, on top of several million tons out of action in China. This amounts to about a 4% reduction in supply. Stockpiles of aluminum in warehouses approved by the LME have shrunk to fewer than 850,000 tons, the lowest level since 2007, according to FactSet. That is a 50% reduction of the stockpiles compared with March 2021. Worldwide demand this year is predicted to be up, and deficits will occur.

Secondary scrap aluminum prices were up 4 cents for aero grade turnings. Copper was flat, but nickel and stainless steel scrap rose about 10%. Steel mills remain busy, and HRC dropped to its lowest level since last year at this time.  Scrap steel dropped $25 per ton.

I am certain that VUCA [volatility, uncertainty, complexity and ambiguity] will be with us for a long time. Tighten up your seat belts, and as Charles Darwin said:

”It is not the strongest of the species that survive, nor the most intelligent, but the most responsive to change.”  

Life is good. Family and health are precious.  

Bruce Shapiro  

I apologize for not responding to previous comments, but my email was incorrectly listed in previous commentaries. Sorry about that, and thanks for reading my Market Insights. Comments are appreciated.

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.