Prices haven't hit bottom yet
By Tom Stundza -- Purchasing, 2/11/1999 2:00:00 AM
In China, the Year of the Tiger is said to bring ferocious upheaval. And the once-roaring Asian economies certainly brought plenty of upheaval to global metals markets in the 1998 tiger year. Recessions forced Asian and Eastern European nations to stop importing raw materials and caused them to ship finished products elsewhere. This disrupted global metal commodity markets by creating a glut of supply and driving prices into double-digit decline rates that dragged them down to 11-year lows.
But prices could drop further in the first half of 1999 because most commodity producers have started the new year the same way they did 1998--with a dearth of customers and a lot of metal waiting to be sold. "Demand has been slack because of the weak economies in Asia, Latin America, and Eastern Europe," says Paul Kasriel, senior economist at Northern Trust in Chicago. "The key driver of commodity prices is demand."
Months of low prices forced some miners and smelters to cut output last year. They haven't trimmed enough, apparently, as the backlog of unsold goods keeps mounting. Example: Copper inventories monitored by the London Metal Exchange, the world's largest nonferrous metals trading forum, have more than doubled since July as mine output surged, sending cathode to an 11 1/2-year low of 65¢/lb at year's end. "With about one-third of the world in a recession, it's no wonder prices are low," says Kasriel.
As a group, commodity economists and analysts foresee no dramatic recovery in consumption--or pricing--in 1999. According to Martin Squires, chief of research at brokerage Rudolph Wolff & Co. in London: "Uncertainty, hence market volatility, is unlikely to diminish in 1999 as political and economic concerns worldwide dominate the headlines." The recessions in Asia, Russia, and Eastern Europe are expected to continue. And with manufacturing expected to slow in Europe, North America, and Latin America, prices for copper, aluminum, zinc, lead, nickel, and tin could fall further in 1999, the mavens say. And domestic spot steel prices are likely to remain depressed.
"With economic growth worldwide expected to remain lackluster in the near term, commodity prices are likely to come under further downward pressure in the first half of 1999," agrees economist Teresa Courchene at TD Bank Financial Group in Toronto. It's much too early in this 1999 rabbit year, she says, to even think about a global recovery in metals demand and pricing. "We are not going to see any real recovery in metals prices until 2000," reckons analyst Charles Kernot at Paribas in London.
Squires at Wolff tells Purchasing that "1998 was a traumatic and volatile year for the base metals because all of them ended the year beneath their 1997 closing values." He points out that "the price weakness wasn't confined only to the LME traded metals, as most minor metals and other industrial commodities (especially carbon and stainless steels) also suffered significantly."
Squires says that it was logical for buyers, confronted with mounting global surpluses, "to turn increasingly to the spot market in preference to forward purchases." This, he says, exacerbated the price decline because all too many metals firms continued expansions into new production capacity. "Metals, indeed all commodities, are in price decline because global demand growth has fallen behind the supply expansion in recent years." He contends that market price weakness will persist in 1999, "as producers have shown a reluctance to curtail output."
So analysts such as Kernot at Paribas and Squires at Wolff foresee expanded production cuts this year, as prices continue their downward track. However, steel and nonferrous metals prices won't start rising dramatically, the mavens insist, until sustained recovery in demand begins in Asia, Latin America, Russia, and Eastern Europe. "Asian demand has been and continues to be the dominant negative influence," according to Merrill Lynch analyst William O'Neill. "Lower Asian demand for commodities will be felt throughout 1999."
However, there is a feeling among some analysts that the so-called "millennium bug" could play a role in boosting second-half global metals demand and may stabilize prices around mid-summer. Squires explains that uncertainty about the reliability of computer programs on Jan. 1, 2000, may prompt metalworking industries worldwide to build inventory, switching from just-in-time materials management to "just in case" raw-materials stockpiling.
Steel: There's just too much
The slowing manufacturing economy will decrease the amount of steel needed in the U.S. this year. Early estimates suggest net sales will slip to 125 million tons this year from 132 million tons last year. Actual net use probably was 120 million tons, based on Bradford Research calculations to adjust for mill, service center, import warehouse, and user inventories. That's because customer stocks, especially those within the distribution industry, are excessive. Steel inventories ended 1998 at almost 12 million tons, and reducing them will take time.
So even if imports drop by the expected 10 million tons from the record-high level of 40-to-42 million tons shipped into the U.S. last year, stocks will overhang the market at least through summer. Thus, actual use this year will slip to around 114 million tons. With 1999 contract prices with automakers and appliance manufacturers already falling by about 3%, spot prices will continue to be weak. "Most steel prices are nearing the low point of the trough," says analyst John Anton at Standard & Poor's/DRI in Washington. "But, demand will be softer as most steel-consuming sectors outside automotive will show weaknesses."
Although major steel-using industries reported high levels of activity last year, steel inventories started to build early in the year when domestic price increases were announced despite major price weakness overseas. Then came the strike against General Motor, which upset the market's summertime equilibrium. Atop all that, various new mini-mills experienced start-ups problems, causing buyers to source steel from offshore. What followed was a torrent of low-priced imports, some of it ordered and some shipped here on speculation. The latter part of the year saw the start of customer inventory liquidation and reduced customer orders for the mills.
Nearly all economists are calling for slower economic growth this year, with their GDP growth estimates just under 2%. Analyst Charles A. Bradford at Bradford Research in New York suggests that economic growth of 2.5% to 3% is needed for steel consumption to be stable, with slower economic growth triggering a reduction in consumption. And although Bradford suggests that domestic orders will improve as imports decrease sometime this spring, he has joined other steel analysts expecting a full-year decrease in steel use.
Steel buyers' expectations for this year are lackluster, at best. In truth, this could become a tumultuous year for steel buyers, with a possible steel strike on August 1 and an auto industry strike possible on September 1. "The steel markets could be whipsawed," says Bradford, with customers (who now are working to liquidate stocks) thrown into a period of inventory rebuilding, followed by another period of liquidation if the possible strikes don't develop.
During the past few months, domestic steelmakers have been on an anti-import campaign, reflecting a large jump in the amount of steel coming into the U.S. Bradford notes that "the plaintiffs have clearly been stating their charges as if they represent proven fact" that foreign carbon steel plate, stainless steel cold-rolled coils, and carbon steel hot-rolled coils have been dumped and caused massive financial woes for domestic steelmakers. "In reality, preliminary rulings by the International Trade Commission stated it found [only] a threat of injury," Bradford says.
So, it's not assured, as some mill execs contend, that imports will be reduced as dramatically as they would like--for example, to the 23-million-ton-a-year average of 1990-1997. The mavens suggest that imports will drop, but probably closer to the 30-million-ton-a-year average of 1994-1997. Analyst Tom Runiewicz of wefa Inc. in Eddystone, Pa., suggests that "steel imports will continue to play an important supply role in the U.S. steel market."
Short term, buyers should plan on paying low spot-market prices for steel this year. "Domestic spot steel prices are likely to remain depressed in 1999," says Bradford, and none of the other mavens are arguing. Purchasing forecasts spot hot-rolled sheet to slip from a 1998 average of $305 to $292. Anton at Standard & Poor's/DRI suggests $279 while Runiewicz is even more pessimistic at a forecast of $271.
Copper: Smelting cutbacks needed
Copper continues to be plagued by overproduction, excess stocks, and weak demand. "Copper prices are unlikely to recover for several years as stocks continue to overhang the market," suggests the latest analysis by Bloomsbury Minerals Economics in London.
London Metal Exchange copper prices have slumped 30% during the past two years to reach an 11 1/2 year low; in the U.S. market, the slide was 43%--from $1.38/lb in 1996 to 79¢ in 1998. Purchasing's initial forecast put cathode at 79¢ again this year. The mavens (and now some mills) have become more bearish, and now look for the red metal to average 65¢-70¢ in the U.S. Analyst Tom Van Leeuwen at CS First Boston in New York says that "prices will fall first and recovery will take time because supply is loose and demand trends are not robust."
Demand in the U.S. has been rising steadily this decade and was in excess of 3 million metric tons in 1998, an all-time record. However, a new Wolff analysis sees "a marked slowdown for growth in 1999." And a U.S. demand dropoff in the fourth quarter could be a harbinger of slowed sales growth--down to 3%-5% from last year's 6%-7% rate.
Note that global demand showed no gain from 1997 because of collapsed sales in Asia and the start of a usage slowdown in Europe, creating a 400,000-tonne world surplus of cathode at the end of last year. "And that surplus won't diminish until raw-materials supplies--blister and concentrates--are worked off," says Bloomsbury.
The development of new copper plants, especially in Latin America, bolstered output to the point that analyst Squires of Wolff foresees a swelling Western World metal surplus and weak copper prices ahead. "Copper supply growth outpaced demand growth last year," agrees analyst Tom McNamara at cibc Oppenheimer in New York, "and the same scenario will be played out in 1999."
The average cost of producing a pound of copper worldwide is about 70¢, according to Brook Hunt Association, a metals consulting group. A number of high-cost producers already have been forced to respond to the deteriorating price environment by shutting operations in Latin America, Japan, the Philippines, China, and Canada. However, many other firms are keeping production flowing in Indonesia, Papua New Guinea, and the U.S. despite low prices.
Until this excess capacity is closed, a sustained price recovery is unlikely, according to the mavens. Production cutbacks to date have been insufficient to reduce the global surplus. The First Boston analysis says 400,000 tonnes/year of capacity has to be shuttered. But Bloomsbury reckons the necessary shutdowns of older, less-efficient mines "will occur only if LME prices stay under 65¢ for an extended period of time."
Aluminum: Sales vigor has faded
North America this year will participate in the global dropoff in aluminum demand that became evident in the latter months of 1998 as producers are starting to boost stocks and drive ingot prices down. U.S. consumption exceeded 8.1 million tonnes last year, an all-time high.
However, there now is serious doubt among analysts whether the market will support earlier forecasts of a modest 1.5% growth in 1999 consumption. Also at risk is Purchasing's forecast of another year of 65¢ primary ingot. "Even steady U.S. aluminum consumption may not erase the 1999 global aluminum surplus," worries analyst J. Clarence Morrison at Prudential Securities in New York. But, for now, he also projects aluminum ingot at 65¢.
The world aluminum market used 29.5 million tonnes of light metal last year and was one of the healthiest of the industrial-grade nonferrous metals earlier in the year. But the collapse in Asian demand caught up with the market in the second half, and several mavens now suggest a no-growth year for 1999 because of the slowing economies of Latin America, Europe, and North America. So, instead of being a market in surplus, an excess of aluminum inventories is being forecast in a range of 250,000 to 290,000 tonnes.
Because of this demand slowdown, LME aluminum will be sold at low prices well into the next decade, according to economist Ted Arnold at Merrill Lynch & Co. in London. "Weak LME aluminum prices are anticipated until world supply gets back into balance with demand," agrees Squires at Wolff, who adds that "demand weakness will cause high market stockpiles and low prices until aluminum smelters get the message and reduce production." In fact, he and some other analysts suggest a no-growth demand year globally as the "Asian flu" infects other aluminum-using economies.
Latest U.S. buyer surveys confirm continued strong demand from the transportation and construction markets. But Asia's economic troubles have severely depressed export demand, which has slowed manufacturing activity and aluminum purchasing by the consumer durables, electrical, machinery, high-technology, and packaging sectors. Thus, while sheet, plate, foil, and extrusion shipments rose last year, deliveries of bar, rod, wire, and electrical conductor products slipped.
Analyst F. Wayne Atwell of Morgan Stanley Dean Witter in New York predicts worldwide aluminum consumption growth of maybe 1.5% in 1999 "because of the Asian economic recession and uncertainties about the economies in Eastern Europe and South America. The slippage in U.S. exports of manufactured goods and the acceleration of Asian-made imports will continue in 1999 and maintain a slow-growth domestic aluminum economy," Atwell says.
Nickel: Market hits head winds
Nickel prices are at their lowest levels in a dozen years, and they are expected to skid somewhat lower this year as specialty steelmaking, the key end-use arena, stays depressed worldwide. "With nickel producers reluctant to initiate production cutbacks in the face of weak demand growth, the resultant metal surpluses are likely to ensure low nickel prices in 1999," says analyst Squires at Wolff.
Total world demand for nickel was about 1 million tonnes last year, but there was new supply of 1.1 million tonnes. Added to previous surpluses, nickel stocks exceeded 115,000 tonnes at year's end. The stagnation in demand last year occurred because demand in such stainless-steel-intensive industries as automotive and construction industries has collapsed throughout Asia, softened in Latin America, and become uncertain in Europe and North America. This, in turn, caused the LME price to fall by causing prices to plunge 33%. In North America, the metal averaged just $2.18/lb
U.S. consumption of nickel was 104,000 metric tons last year, which was the same amount used the year before. "The key question for 1999," according to Squires, "is whether market demand in North America and Europe, which has remained fairly strong, will continue to offset Asia's drastic declines." However, even some nickel producers expect a minimal North American and European demand decline because of projected weakness in the stainless steel market this year.
North American stainless steel mills continue to be battered by low-priced imports from offshore and are uncertain whether production will rise this year and trigger an increase in nickel purchasing. And note that specialty steelmaking accounts for 65% of primary nickel use. In Europe, heavy manufacturing industries are poised to slow output this year and reduce their buying of stainless steels. "The one bright point for nickel consumption has been in nickel-based superalloys for jet aircraft engines, but even this market now looks vulnerable," says analyst Morrison at Prudential Securities.
At present, Purchasing is forecasting nickel prices to average $2.01/lb in 1999. Morrison is only slightly more bullish at $2.10. In London, Wolff sees LME nickel at $1.86, which brings his North American nickel price average under $2.
In fact, since nickel costs about half of what it did in 1990, analyst Waldo Best with Morgan Stanley Dean Witter, New York, suggests the market may be in a new price era where the metal is persistently under $2/lb. "It's been on a steady slide from the $4 level," Best says, and nothing about long-term demand from the world stainless steel industry suggests demand will catch up with supply anytime soon.
Zinc: Softer sales have begun
Zinc has been a more or less balanced market worldwide for the past two years, but a surplus is imminent this year, according to the market analysts. "In 1999, with the depressed Asian construction and automotive industries, coupled with a foreseen slowdown in activity in the U.S. and Europe, supplies will exceed demand and prices will remain under pressure," says Squires of Wolff.
Demand worldwide has been stuck at 6.4 million tonnes since 1997 and could be as much as 3% below that this year. World production, on the other hand, is going through a period of expansion, buoyed by a forecast 7% increase in mined output, primarily in Australia, India, and the U.S. Combined with a rise in refined capacity, buyers can expect a Western World zinc metal surplus of 100,000 tonnes this year.
In the U.S., zinc use has been disappointing for suppliers. They had expected use to grow by 5% last year because of solid construction and motor-vehicle manufacturing. These are the largest end-use markets for galvanized steel, the principal end product for zinc. However, in 1998 zinc use was flat at the 1997 level of 1.28 million tonnes. Steady earlier growth in use by such non-traditional markets as commercial and industrial machinery came to an abrupt halt in 1998.
Whether zinc demand rises or falls in the U.S. this year depends on demand from steel mills and independent galvanizers, who in turn will depend on demand for zinc-coated steel from automotive and construction products. Right now, the outlook for galvanized steel demand from local mills is a flat-to-down year, depending on the rate of the expected throttling down of metalworking activity.
Steel industry insiders are bullish about the demand this year for galvanized products, noting the plethora of bridge and highway projects that will begin construction this year. However, even they are uncertain about the projected volume of imported galvanized sheet that would reduce the production of their galvanized sheet.
Special high-grade zinc returned last year to its previous recent average of 52¢/lb, proving 1997's 65¢ price to be an anomaly caused by speculators and unsound supply-demand fundamentals. This year, Purchasing expects special high-grade (SHG) zinc to slide to 47¢. The mavens agree with that projection, as Squires of Wolff sees LME zinc no higher than 44¢ for the year.
Lead: Market could rise or fall
Lead is facing a year of substantial oversupply after having been largely in balance in 1998. A surge in mine output, principally in Australia, is expected to lead to higher capacity utilization rates at primary smelters. Secondary output also is expected to rise which could drop LME lead to 21¢ and North American lead to 40¢, according to the mavens.
Lead demand was lackluster globally, and actually dropped 1% to 5.1 million tonnes last year due to dramatically lower Asian motor-vehicle assembly. The metal is used to make starting, lighting, and ignition batteries, with most lead going into new or replacement lead-acid batteries. In the U.S., demand slipped to 1.55 million tonnes from 1.6 million tonnes in 1997. The mavens look for world demand to slip again to 5 million tonnes, and for U.S. demand to stay at last year's level.
Purchasing's early estimate of 47¢ domestic lead is based on an anticipated cold winter in the northern hemisphere, which would boost demand for replacement batteries and drain inventories of the metal. The bullish view of use back at 1.6 million tonnes also supposes strong demand for new batteries from motor vehicle manufacturers in North America, Europe, and South America. The analysts, however, see much lower prices because they aren't convinced of a rebound in North American use, a sustained collapse of Asian automotive manufacture, and reduced assembly in Europe and Latin America.
Tin: Expect some stumbling
Over the past two years, tin has fared better than most industrial commodities. Although it hasn't been totally unscathed by the collapse in the Asian economies, tin demand rose by the expected 1.5% and supply fell by 1.5%, leaving no surplus or deficit. "Tin's demand inelasticity, coupled with the low commercial stock availability and few production disruptions, enabled tin to buck the steep downward price trend of other base metals," notes analyst Squires of Wolff.
Upshot: LME tin has stayed around $2.55/lb for the past two years. Still, some slippage in demand from steel mills in the U.S. caused alloyer's grade tin to dip to $3.73/lb last year from $3.82 in 1997. However, this is a thinly used metal. World demand last year was 187,000 tonnes. So was supply.
However, tin supply looks to rise this year to about 191,000 tonnes, as producers in South America and Southeast Asia have added some capacity, which analysts think will increase the downward pressure on prices. Wolff's analysis, for example, sees LME tin sliding to $2.45/lb from last year's level. That's based on the belief that demand growth won't match supply.
While only a moderate 2,000-tonne oversupply in tin is foreseen for this year, there will be a Western World surplus beginning next year and well into the new millennium, suggests Squires. This scenario, he says, will keep prices relatively stable for the foreseeable future.
U.S. demand last year rebounded by 16% to 51,500 tonnes from a 1996 slowdown. Since the U.S. imports 91% of the tin it uses, foreign price weakness helped keep U.S. prices down. Purchasing's early forecast of tin slipping marginally to $3.67/lb in the U.S. is based on weaker demand again in 1999.
Commodity metals in a pricing spiral
Commodity prices fell 17% last year, based on the Bridge-Commodity Research Bureau index, which tracks 17 futures contracts. That's the biggest decline since 1981, and it came amid slumping international demand for raw materials. Little wonder that such other gauges as the Rudolph Wolff Metals Index and Purchasing's indices dropped. Purchasing's steel index was the lowest since it was created in 1990; the nonferrous metals index slipped back to the 1990 level. Most analysts see continued low price tags this year. "We would not be bold enough to say that the worst is over and it probably is not," says Merrill Lynch analyst William O'Neill. "Still, there are a few indications that second-half 1999 will see the initiation of a transitional period out of abject bearishness into at least a more neutral period for commodities."
Fe Steel, the least expensive and most widely used metal, is made primarily of iron and carbon with thousands of varieties possible, depending on the content of those elements and such other alloying metals as chromium, nickel, manganese, silicon, vanadium, and molybdenum. Stainless is the most common of the alloy steels. Steel's major markets are transportation, major appliances, construction and contractors' products, machinery, and what has been described as "innumerable" other metalworked products.
CuCopper, the reddish metal, is an excellent conductor of electricity and is celebrated for its corrosion resistance. Used in a broad range of alloys, it is the basis for brass and bronze. Copper and copper-alloy products are consumed in building construction, electric and electronic products, industrial machinery, transportation equipment, and numerous consumer and general products. Smelted metal has been in use as far back as 8000 B.C.
AlAluminum is a silvery white ductile metal, with tensile strength. It is malleable, resistant to corrosion, and a good conductor of electricity. It's a lightweight, strong metal produced from alumina, which is processed from bauxite ore. Commercial use is only 100 years old, yet the metal is second only to steel in tonnage consumed annually. Aluminum is used to make transportation, packaging, building, electrical, and consumer durable products.
NiNickel is a hard, silvery-white metal known primarily as alloy to improve strength and corrosion resistance of other metals, notably steel. It's also used in alloys where high resistance to corrosion is important, such as for chemical reaction vessels and pumps, and where high resistance to temperature is important, such as for aviation equipment. Pure nickel is used in electron tubes and galvanic plating, where objects must be coated with nickel before they can be plated with chrome.
ZnZinc is a bluish-white, lustrous metal derived from ores that also contain lead, silver, copper, germanium, and cadmium. It exists as an essential nutrient element in soils and animals, and is used primarily as a galvanized protective coating for steel (especially steel destined for use in construction, transportation, and electrical equipment). Other major uses are in die-casting alloys; brass and bronze alloys; and compounds and dusts used by agricultural, chemical, paint, and rubber industries.
PbLead is a soft, bluish-white metal that is highly malleable, ductile, and resistant to corrosion. It's obtained from galena ore. Major end use is storage batteries, which accounts for 60% of world lead consumption. Lead also is used to dampen noise, in containers for corrosive liquids, and as radiation shields for X-rays and nuclear reactors. Lead is still used in ammunition, construction, plumbing, and cable covering, but many users are shifting to alternative materials because of lead's toxicity.
SnTin is used as a protective coating for steel, as an alloy with other metals to make bronze, pewter, and die-casting alloys, in biocides to control insect infestation, and as an alloy with titanium for aerospace parts. It's also used in solders for joining pipes or electrical conductors. Tin is one of the earliest metals known because of its hardening effects on copper which was used to make bronze for fabrication of construction and hunting tools and war weapons as early as 3500 B.C.
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