Plunging equity markets and climbing dollar values continue to depress metals demand, prices

Taking a cue from plunging global equity markets, the London Metal Exchange (LME) this morning is again weaker with multi-year lows posted for copper and aluminum. Nickel was trading at levels last seen in July 2003. A stronger dollar also not helping metals prices (it’s at a two-year high).

We’ve seen a bunch of disappointing macroeconomic releases over the past week or so– from auto sales to housing to industrial production to consumer sentiment…the list goes on (and on). Anyway, not to beat a dead horse but here’s an updated CRB Metal Index is pretty much confirming what we’re experiencing in the marketplace. The CRB Index consists of copper scrap, lead scrap, steel scrap, tin, and zinc–and it’s down 30% from its end-April peak. (Uggh! I can’t wait to see the October chart.) 

Ferrous marketplace is weaker

This week ushered in the Chicago Merc’s steel futures contract, providing electronic trading that’ll match anonymous bids and asks for hot-rolled (HR) sheet in coil. The contract size is 20 tons with a minimum price fluctuation of $5 per ton. Ho-hum! There’s not much there (yet) to get excited about.

Moving beyond HR futures, in the “real” marketplace, latest price indicators placed Midwest HR coil around $815/ton, f.o.b., with leadtimes measured in days…SBB, however, was reporting a range of $800-$880 for HR delivered “to many small to mid-sized customers.” Actually, we’re now hearing numbers closer to $760 – some 30% lower than what was published back in May/June. (Editor’s note: Mid-month preliminary Purchasing survey of buyers for HR was $760, as well.)

And ferrous scrap? Lots of prices to choose from, assuming, that is, that mills and foundries are even buying. The RMDAS October benchmark for No.1 HMS (heavy melt steel), for example, was figured at $205/gross ton with so-called “prompt material” (an average of #1 bushelings and bundles) at $261. Other published sources are reporting bushelings ranging from $239.50 to $251; for shredded material, the most current

range is from $225 to $240, delivered. Prices, however, are changing fast and only in one direction: This week’s Iron Age is showing its No.1 HMS composite at $182.50 and its Chicago bushelings price at $214.50…

Then, there’s the latest inventory report from the Metals Service Center Institute notes that North American steel inventories were lower last month. Still, with weak shipments anticipated in the near term, inventories will have to drop further in the months ahead. The other positive out there is the rate of announced production cuts both in the U.S. and elsewhere. By some calculations, it’s expected that between 10%-25% of domestic steelmaking capacity will be cut by year’s end. Canada, Brazil, Russia, Europe, and China have also announced cutbacks. (China’s crude steel output fell to 39.6 million metric tons last month, down 7% from August and 9.1% below the level seen the same month last year.)

Michelle Applebaum Research believes that 25% of global steel making capacity

will be idled “within the next three months.” Led by China, September’s world steel production fell 2.4% year-on-year…the first monthly fall since December 2001. Macquarie Research has lowered their 2008 global production forecast from 1.45 billion

metric tons, to 1.391 (a 4.1% decline).

So what does the near term look like? Well, to Goldman Sachs’ analysts, the near term looks terribly unbalanced and, thus, they’ve subsequently “slashed” their price outlook for HR coil. Prices, they say, will continue to fall, bottoming out at $650 by January 2009 and stabilizing at lower than previously expected levels. For a 2009 forecast, the firm sees HR averaging $677 with 2009 mill shipments placed at 101.8 million short tons, down 8.7% from their 2008 shipment estimate.

It sure looks like those production cuts will be with us for quite some time.

Nonferrous is in the dumps, too

No surprise but we’re seeing a few more analysts lower their 2009 forecasts for base metals. The latest is from Deutsche Bank, for example, has global GDP figured at 1.2% growth next year and with it, a copper average of $1.89/lb for 2009. DB’s aluminum forecast is now an average 85¢ in ‘09, and nickel to average $4.66. Brokerage firm Sanford C. Bernstein also sees lower global growth and a copper average below $2 next year; Mitsui Bussan Commodities, however, looks for a second-half ’09 recovery and is forecasting $2.70 copper; $1.10 aluminum; $7.67 nickel; 90¢ lead, and 88¢ zinc as averages for the full year.

Our friends at Dahlman Rose have also gone back to the drawing board, arriving at fresh forecasts based on the implications of assumed slower global growth. The firm noted that their base case and bear case scenarios are more conservative than their view presented approximately one month ago. At any rate, their base case now has aluminum averaging $1 for fourth quarter 2008, and $1 for all of 2009; copper, they believe will average $2 in ’09.

Also it was no surprise that the mood during LME Week was down-in-the-mouth.

Barclays Capital analysts read the consensus as “metals demand in the U.S. will remain weak well into 2009.” The situation in Europe, they said, was also expected to get worse before getting better. Opinions concerning emerging markets, however, were more divided but attendees believed China would take a more proactive approach if faced with much slower economic growth. Others, meanwhile, talked about production cuts,

especially so for aluminum as well as for zinc and nickel – and that was the “good” news.

Macquarie Research also surveyed attendees, and while sentiment was also overwhelmingly bearish with respect to global economic growth, those contacted believed that base metal prices were expected to bottom before the end of 2009.

Moving on, the latest from the International Copper Study Group continues to show a refined global copper metal surplus. For the year, it placed the number at a “modest”109,000 metric tons, but growing to 277,000 tons in 2009. Thus, with lower prices being forecast and inventories building, some now see this as an opportunity for China’s State Reserve Bureau to replenish its red metal inventories.