Economic headwinds continue to quiver the metals marketplace

Scrap magazine’s 2008 Market Forecast story (in its January/February 2008 issue) identified several “headwinds” that were of concern for the U.S. and global economies in ’08, all pretty much all traced to the domestic ‘07 subprime mortgage debacle and its ensuing credit crises. The worries at the start of the year included rising inflation expectations, higher energy costs, the weakening U.S. dollar and “an overly anxious investment community” that, combined, had the potential to bring about a “stagflation” environment for the year ahead.

The question asked at the time was, “Have the headwinds picked up velocity?” If this month is any indication of what may be in store for the balance of the year, the simplistic answer is “Yes.” A lot more attention has been given to the effects of slower global growth, especially with China now that what was termed a “pre-Olympic frenzy” has cooled. And for the U.S., the lingering effects of a slumping housing market, a weak auto industry and a fragile financial system have dented year-to-date GDP growth as well as confidence that the worst has past.

As a consequence, commodities are taking a beating as August gets underway, especially so now that we’re seeing the dollar with some new found strength. Equities, meanwhile, have suffered all year so far.

Moving on…No surprise that the Fed kept its federal funds rate at 2%; what was more interesting was what the governors had to say about inflation: Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Fed Open Market Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

Ferrous update…Latest indicators put the f.o.b. Midwest hot-rolled sheet in coil (HRC) price at $1,075 - $1,095/short ton, with spotty reports of offers at $1,000. (Editor’s note: July’s monthly range was $1,060 - $1,090.) In the near term, Goldman Sachs acknowledges “softening demand” in the U.S. market, estimating that HRC prices will peak in October at $1,150 per ton.

Domestic ferrous scrap buying for August delivery is said to be reflective of softer order books for July and August. This week’s Iron Age is showing its No.1 Heavy Melting Scrap (HMS) composite price at $497.50/gross ton, off $25.67 from a month ago. The Chicago bundle price stood at $894-$895, delivered; shredded scrap was at $592 -$593. Other sources, however, are placing shredded scrap down $40-$65 from that level and No.1 bundles off $30+, bringing that price closer to $860.

We’ll have a better indication for August prime grades, shredded material, and pig iron by next week. The HMS decline was pretty much telegraphed by any number of publications in the past week, so the lower numbers that we’re seeing are not catching folks off guard; if anything, the decline was considered relatively modest, given the advance reports. We’re already hearing of lower numbers for September.

Nonferrous update…Copper was off to a shaky start with last Friday, Monday and Tuesday’s selling lowering the September contract by nearly 25¢/lb on the London Metals Exchange (LME). Market players continue to assume lower consumption prospects from China post-Olympics as a major consideration coupled with worries that U.S. demand will also disappoint, as will the Eurozone and Japan.

Technically, too, the copper market looks especially vulnerable having traded below two important indicators: its 200-day moving average ($3.54) and its June ’08 low ($3.52.) Others, however, see an oversold copper market and view this as a buying opportunity while still others are convinced that copper has not bottomed. Base metals in general, and copper specifically, look pretty fragile at the moment.

While noting that copper prices remain “significantly” above marginal production costs, and that copper prices will correct, Dahlman Rose & Co. is still looking for cash copper to average $3.65/lb this year. The firm sees refined global production outpacing refined consumption but not enough to erase a projected supply shortfall of some 128,000 metric ton this year. “We are positive on the outlook for copper…”

Regarding aluminum, prices had been firmly underpinned by concerns that power shortages would continue to offset nagging worries over global demand, but with inventories climbing, lower consumption prospects have moved to the forefront, overshadowing both energy and supply. Latest mid-year forecasts offered by Reuters have LME cash averaging $1.35/lb pound for all of 2008, well below the $1.50 record high reached in May.

On the scrap front, the secondary smelters are reporting softer sales and, consequently, are offering lower numbers for scrap delivered. Our sources confirm old sheet and cast in the low 80¢ range with MLCs (mixed low copper, aluminum clipping and solids) in the upper 80s and painted siding commanding 85- 86¢. As for 380 alloy going out the door, that market is currently in the low $1.20 level, delivered. UBCs (used beverage containers)? A “soft” market so far this August with cans figured at 96.5¢ delivered.

As for nickel, LME nickel prices were trading at a two-year low below $8/lb this week, having contracted by more than 50% since reaching a high of $16.30 earlier this year. Market participants have priced in lower demand from the stainless steel sector that accounts for around two-thirds of global nickel consumption.

Although some recovery is forecast in the final months of the year, it appears the nickel supply will be more than enough to meet the demand from the stainless sector. The Reuters LME cash average for this year was $11.66. As noted this week by Macquarie Research, the upside rests with China’s stainless steel cutbacks, and cutbacks in nickel pig-iron supply.

(Due to travel and vacation, this will be the last update until August 29th. BG)