Macroeconomic outlook weakens; commodities down
Last Monday, the Institute of Supply Management’s manufacturing index increased to 35.8 in February from 35.6 in January. The consensus had expected a decline to 33.8, but keep in mind that any reading below 50 signals a market in contraction. At any rate, the output components of the overall index were mixed but to some, Monday’s report may hint that although the manufacturing sector continues to contract (13 months in a row) it is not doing so quite as intensely as it did in late 2008. Small comfort!
Our friends at Navellier & Associates, however, believe that the ISM report is one of the “best gauges for identifying economic troughs.” The ISM, they note, typically turns decisively higher about fourth months before the overall economy rebounds…and while a 35.8 number isn’t what they call “decisive,” to them it was still “a pleasant surprise…” Still others, such as our good friend Dennis Gartman believe that “changes to the right of the decimal place are of no importance whatsoever…none…zero…nada.”
In other macro news, consumers actually increased their spending back in January on both a nominal (cash) basis and an inflation-adjusted basis. Is this saying that the worst is over for consumer spending? That’s a bit of a stretch since economists are forecasting a 4% decline in spending this year. In addition, the personal saving rate (the share of after-tax income that is not spent) is increasing. Last month it rose to 5%, the highest level since 1995.
We also should also note that January’s construction spending was much weaker than expected, declining 3.3% vs. the consensus guess of -1.5%. Construction spending was also revised lower for the previous two months. Not good. February auto sales were even worse than expected as auto sales dropped by more than 40% in the latest month to their lowest levels in almost 30 years: General Motors posted a sales decline of 53%, with Ford at -48.2% and Chrysler not far behind at -44%. Japanese automakers fared a bit better with sales dropping by 37% at Toyota; Hyundai saw its sales dip only 1.5%.
The non-farm payrolls report was expected to show a job loss of 648,000 with an unemployment rate expected to show a 7.9% rate for February. Wednesday’s ADP report on employment in the private sector came out with a 697,000 job loss, worse than expected, a depressing preview of today’s non-farm report. Manufacturing contracted by 219,000, marking three years of consecutive job losses!
(Editor’s Note: According to the Labor Department report issued after Bob’s commentary was written, 651,000 jobs were lost in the month of February, increasing the number of persons unemployed in America to 12.5 million. The unemployment rate rose from 7.6% in January to 8.1%.)
ADP now thinks that first quarter ’09 GDP will contract between 5% and 6% while Goldman Sachs is now projecting that real GDP this quarter will fall at a 7% annual rate and will drop another 3% in the second quarter; for all of 2009, the expectation is that the economy to be down 3.2% vs. the minus 2.2% previously forecast.
Now looking at Ferrous Markets, this week’s Scrap Price Bulletin is showing little change in their reference prices for No.1 HMS (heavy melt scrap), shredded scrap and No.1 bundles. The HMS composite price was placed at $181.50/gross ton, down less than $3 from early February while shredded was down $20.67 at $219.17 from one month ago and 41% lower than a year earlier. Ah, those were the days!
Other sources such as Platts placed last month’s average for shredded scrap delivered at $227.63/ton. Their current reference price for shredded is listed at $225/ton delivered.
At this week’s Steel Business Briefing Steel Conference in Chicago, Mark Parr of KeyBanc Capital Markets, reported that contacts at the program were talking about a March ferrous scrap market that looked to be “down $10-$20/metric ton.” We’re also hearing the same with HMS figured around the $170/gross ton mark, delivered, bushelings at $190-$200/ton, and shredded ranging at $205 - $215/ton. We’ll have a better handle on this next week but it’s clear that ferrous scrap is weaker and weakening.
Moving on to the finished steel side, our friends at Purchasing reported that their benchmark hot-rolled sheet prices eased below the $500/net ton mark – a first in 42 months, and miles from the July 2008 peak of $1,068. They placed the February average at $499/ton. SBB, meanwhile, is showing its Midwest f.o.b. reference price for HR coil at $506/ton. Platts has its Midwest HR reference price at $500/ton. So, was February the low? Nice thought, but with conventional thinking convinced that we’ll see a hefty
steel consumption drop this year, transacted spot prices have not seen the worst, Purchasing, for example, is looking at HR at the $450 level for May…
Looking at Nonferrous, a quick look at the first two months:
(Comex and London Metal Exchange cash basis)
Commodity at end-December ’08 at end-February ’09 % change
Comex copper $1.3950/lb $1.5260/lb 9.4%
LME copper $1.3930 $1.5377 10.4%
LME aluminum $0.6600 $0.5851 -11.3%
LME nickel $4.9033 $4.3885 -10.5%
LME zinc $0.5080 $0.4876 -4.0%
LME lead $0.4305 $0.4649 8.0%
LME tin $4.6970 $4.9895 6.2%
Any positives to note? LME cancelled warrants for copper and zinc are getting attention this week. Analysts believe we’ll soon be seeing copper and zinc taken out of LME warehouses, suggesting an increase in physical demand – not necessarily fresh consumption but more of a reflection of Chinese stockpile buying. So far this year we’ve seen a heap of metal flow into LME warehouses, led by copper, zinc and aluminum deliveries.
We’re seeing copper benefit from recent LME warehouse drawdowns but the jury is out whether this is just SRB buying or a true reflection of some demand tightness in the marketplace. The copper scrap side of the equation, however, sure seems to saying just that based on some of the numbers we’re seeing for U.S.-based scrap heading to the south of China.
Scrap spreads remain very tight as we reported last week…this week, however, we’re hearing similar to somewhat wider numbers this week with No.2 around -15 to -20 cents under May copper, putting the price around the $1.40/lb range, and Honey @ $1.00 - $1.05/lb f.a.s. And while the export numbers may be eye-opening, our sources see this only as a short term supply response from the south of China given the paucity of offshore orders they’re seeing from Chinese factories.
Midwest ingotmakers, meanwhile, are looking at radiators at $1.05 - $1.15 delivered and red brass at $1.20-$1.25, ranges are unusually wide reflecting the balance of needing copper units and finding the right supplier. With copper prices on the upswing through mid-week this week, quotes are all over the place trying to keep pace.
Along with the fundamentals, and from purely a technical perspective, Barclays Capital sees copper potentially breaking out from its three-month range, with a move through $3,670/mt opening a push, they say, towards the $4,366 area. While also recognizing copper’s larger bearish trend as evidence by its large short position and the spread between cash and 3-months forward prices, this same combination was in play during the February 2007 lows, preceding a three-month, 58% gain. Barclays is NOT looking for a similar reaction, but they’re keeping a sharp(er) eye on copper.
Aluminum is also little changed although showing some life this week…domestic scrap numbers, earmarked for Midwest secondaries are a penny or so higher than we quoted a week ago, placing old sheet and cast at 32¢ and 33–34¢, delivered.
In other scrap news, UBCs (used beverage containers) moving in a market described as “deadly quiet.” Buying is not the issue since material is available. The latest we’ve heard for cans has that market 44¢, delivered.
