The now-official recession is depressing metals prices

OK, so it’s official: The National Bureau of Economic Research said Monday that the U.S. is in the midst of an economic recession. The NBER, a private nonprofit research organization, said its group of academic pointy-headed economists decided that the U.S. recession began last December, thereby ending an economic expansion that lasted from November 2001 until December 2007, some 73 months.

Ah, those were the days…

The scary thought now is that we’ve been in a recession for a year already and we still may not have seen the worse. The last big recession in the early 1980s lasted 16 months…we’re at 12 months and still counting. Going back even further, the average length of an economic contraction over the entire 1945-2001 period lasted only 10 months!

Yep, sure looks like this one is heading for the record books…

Our friend Lynn Reaser, chief economist for the Investment Strategies Group at Bank of America, 2008 reckons that this recession is likely to last until around next spring.

As if to confirm the worse this week, the Institute of Supply Management reports it November Manufacturing  Index fell to 36.2 from 38.9 in October. The consensus had expected a decline to 37.0 but, as observed by FT Advisors, the output components of the overall index all went from weak to weaker with production and new orders at 1980 lows. Upshot: Sharp declines in construction and manufacturing sector will keep downward pressure on the metals sector…it also supports the view of most that the U.S. economy is contracting substantially this fourth quarter. FT Advisors is also looking for further reductions in manufacturing output in the months ahead, but at a slower pace than the last few months “as a recovery starts to take hold.”

Let’s hope so.

Meanwhile, domestic auto sales for November were a disaster – down 36.7%, the lowest rate in 26 years. The Big Three automakers have returned to Congress this week looking for some $34 billion in financial help. Those less sympathetic such as Robert Cyran at Breakingviews.com, point out that Detroit is simply saddled with too many brands, retired and active workers, capacity, and debt. Consequently, bridge loans to get them through the next several months or even years won’t rectify this. He believes that the dollars requested appear only sufficiently large to keep them “standing still.”

Back to metals, copper and aluminum were the weakest metals this week; copper traded on the London Metal Exchange fell Thursday to $3,245/metric tons ($1.47/lb), a levels not seen since July 2005, while aluminum dropped to $1,576 (71¢) as inventories reached 14 year highs. Data provided by BaseMetals.com shows that the LME sold off across the board this week with several metals hitting multi-year lows. Aluminum, for example, traded to lows last seen in May, 2004…copper was at a fresh 3 ½ year low…nickel traded at prices last seen mid-2003. And now it’s Friday morning and the base metals complex remaining under relentless selling pressure based on the crappy demand outlook; Aluminum was trading on the LME at a fresh five-year low…three-month copper was under $1.40.

Looking at steel, domestic mills are only operating at 50% capacity so that current raw steel production is at levels last seen some 25 years ago, according to latest American Iron and Steel Institute data. A year ago, mills were operating closer to 90%. Complimenting lower melting rates is the corresponding lower inflow into scrap yards. Goldman Sachs, for one, reckons that incoming volumes are off by 70%–all this possibly setting the stage for an interesting reaction along the supply chain if/when substantial mill orders return…

On the finished steel side, Steel Business Briefing placed its Midwest hot-rolled sheet in coil (HRC) reference price at $594/short ton, down some $77 from a week ago. GFMS Metals Consulting believes the market could see a bottom this month of around $500-$600 that will last, they say, into the first quarter of 2009

We also saw a sharp increase in finished steel imports. October imports from China, for example, hit 647,450 metric tons, a record monthly amount this year. Total imports from all sources this year are expected to at least match last year’s 33.2 million short tons remaining well below the record set in 2006: 45.3 million tons.

Michelle Applebaum Research believes that import levels will not trend higher over the remaining months due to economic uncertainty as well as “declining domestic prices.” For next year, Goldman Sachs expects to see total imports moderate around the 32 million ton level, but its share of apparent domestic supply will likely increase from around 18% to 23%.