Metals activity, nonferrous and steel, isn’t very vibrant

Activity on the London Metal Exchange (LME) is closing the week by again reflecting soft demand, a firmer dollar, and fresh deliveries of metal into LME warehouses. Copper was trading today at a three–week low with stocks now at a 5-year high; aluminum inventories posted a fresh all-time high as prices slumped to a 6+year low.

China’s fourth quarter gross domestic product came in at 6.8%, and for the full year, economic growth was figured at 9% — the first year since 2002 that China’s GDP expanded less than 10%; in 2007, economic growth was placed at 13%. Latest statistics show that China imported 5,580,000 metric tons of copper scrap last year, 0.1% lower than in 2007. The U.S. share of that total, based on latest USITC (U.S. International Trade Commission) data (11-months annualized) worked out to be 13%.

In other copper news, CRU’s latest anlysis sees London Metal Exchange (LME) cash copper range bound, trading between $2,850 and $3,450 per metric ton, while also observing that prices have trended higher since the lows visited on Christmas Eve. Although the copper market still looks “painfully weak,” CRU does expect cash prices to post a higher monthly average for January. That would be the first rise since July 2008. Looking a bit ahead, however, CRU also sees higher LME inventories (they’re now already at a five-year high) along with pressure building for prices to head lower as copper stocks grow.

Aluminum scrap imports into China, meanwhile, totaled 2,150,000 tons, up 3.1%, with the U.S. share estimated at 48%.

This has been a difficult week for the LME base metals complex with some convinced that that prices are looking to test their December lows, just as some are sure that equities will soon test their November 2008 lows.

Of the lot, aluminum continues to struggle with relentless deliveries of metal into LME warehouses–although it matters whether the metal is from privately held inventories and, thus, now “visible” or whether it’s new production, the point being that inventories are building, and fast. One cannot ignore the relationship between stocks and prices. LME inventories ended the 2008 at 2,338,300 metric ton versus today’s 2,692,325, up 15% so far this year, and a new all-time high.

In the face of deteriorating consumption prospects, global aluminum producers have responded by cutting primary production (mostly in China) and more cuts are in the offing. So far, estimates place current cutbacks at around 10% global capacity. Nevertheless, the forecasts we’ve seen for 2009 call for a market that’s way out of balance, hence the conservative price forecasts.

The latest from Macquarie Bank has LME cash aluminum averaging 70¢/lb this year, compared with last year $1.17 average. Barclays Capital also sees a huge supply/demand imbalance this year along with a 92¢ average for the year. Scrap Magazine’s Market Forecast story (in the Jan/Feb 2009 edition) found that the consensus among the analysts contacted called for a ’09 average below a buck a pound. (Editor’s note: A consensus of 14 analysts/economists calculated by Purchasing.com comes in 79¢.)

Ferrous outlook is down

Winding down last year, the Metals Service Center Institute reported that December’s U.S. steel shipments by distributors fell 29% from year-earlier levels. For the full year, 2008 shipments fell 10.6%. As for service center inventories, they also fell; at end-December, domestic stocks stood at 8.6 million tons, 16.1% below year earlier levels, the lowest since September 1991. Even so, supply on hand was figured at 3.6 months–which is still very high. Goldman Sachs reckons, in fact, that stocks need to fall an additional 20% or 2.5 million tons to match the weak demand. It’s either that, or demand will have to increase 40% from December ’08 levels. (We’d all vote for the 40% demand increase.)

As widely reported, CitiGroup is forecasting this year’s domestic steel production to reach 96 million net tons, down some 15% from 2008 and visiting an output low last seen in the mid-1980s. Steel’s utilization rate in ’09 was figured at 69% for the full year vs. a current operating rate that’s currently below 50%.

As for hot-rolled steel sheet in coil prices, CitiGroup is looking at an average f.o.b. price of $513/short ton this year after averaging $844/net ton in 2008. This week, the Midwest market is figured at ranging between $525 and $533 for HRC with Chicago bushelings at the $252 - $253/gross ton range and the No.1 HMS (heavy melt scrap) composite price stands at $202.83/ton, per the Scrap Price Bulletin.

Again, the bigger picture: Macquarie Bank is forecasting global steel production to reach 1.23 billion metric tons this year, down 7.3% from last year’s estimate by the World Steel Association of 1.33 billion tons. China’s 2008 steel output was estimated at 502 million metric tons, the first country ever to produce more than 500 million. U.S. production, meanwhile, was figured at 91.5 million metric tons (100.9 million net tons)–the lowest since 2002. Total global steel production last year fell 1.2% as reported by World Steel Association.