ISM indexes on the threshold of renewed growth

We do pay attention to the monthly Institute of Supply Management’s Purchasing Managers’ Index: The April number jumped to 40.1 from 36.3 in March and has now increased for the fourth consecutive month. (Editor’s note: Purchasing magazine’s Purchasing Manager’s Index hit 42.0 in April, the fifth consecutive month of growth.)

Also important is that the ISM index is being led by new orders which so far this year is up at the fastest rate since the economic recovery in late 1980. The April number was 47.2 vs. 41.2 in March and 33.1 in February.

Although the 50 benchmark level indicates whether the economy is contracting or expanding, economists believe that typically the overall economy is on an upswing once this particular index gets above 41.2 and that important threshold looks within reach next month. Others also note that this index leads the overall economy by about four months.

April’s ISM index offers support to what we heard from Brian Wesbury at the our (Institute of Scrap Recycling Industries) Convention’s Economic Spotlight program last week in Las Vegas. Brian offered an array of charts providing evidence of a consumer-led economy that he believes will be expanding at a 3%-3½% rate in the second half of the year based mostly on “a sea of liquidity…” generously provided by the Federal Reserve.

Those less convinced, however, note that the weak auto industry will limit any upside potential. As widely reported, April auto and truck sales were grim. A bumpy ride ahead to say the least, and don’t forget that domestic auto production accounts for around 20% of flat-rolled steel production.

Panel member Michelle Applebaum’s steel perspective at the same session provided a much less optimistic outlook over the near term, while Chuck Bradford’s remarks at the Ferrous Spotlight program anticipated “an upturn in orders within a few months…” along with a U.S. economy that’s expected to be in positive territory by the fourth quarter.

This last sentiment was also echoed this week by Fed Chair (Ben) Bernanke testifying before Congress’ Joint Economic Committee. Readers, however, may recall that last month’s IMF report on the global economy has the U.S. economy contracting 2.8% this year with recovery projected to start by the middle of 2010. Average GDP next year is forecast only to be 0%. Bernanke, however, is looking for GDP to grow 2% in 2010.

Looking at Ferrous: First quarter domestic steel production was figured at 13.21 million net tons, 53% lower than comparable first quarter 2008 production, along with a capacity utilization rate that averaged 42.9%…Yipes!

The domestic spot market for Midwest f.o.b HR is currently figured around the $400/net ton mark with a couple of industry publications currently reporting ranges of $380-$420. For the month of April, Platts Midwest average was $413.81/ton, down 13.4% from March…Purchasing magazine placed its benchmark average for April at $420…

Despite some cautious optimism expressed at our Convention, the near term outlook for steel does not inspire much confidence. Purchasing, in fact, is looking at a $400/ton HR average for this month along with a $390 average for June before inching back to the $400 level by July. It’s our understanding that at $400/ton, that’s below the industry average cost of production for hot-strip.

As for ferrous scrap, Platts also reported that shredded ferrous scrap prices fell 14.6% in April, with its average placed at $162.38/gross ton vs. March’s $190.23. They place the current Midwest market for shredded scrap at $190/gross ton, delivered.

As May gets underway, Scrap Price Bulletin is reporting its No.1 HMS composite price at $146.50/gross ton, with shredded scrap at $175.17 and Chicago bushelings at $157.50 (look for upward revisions next week!).

Again referencing Purchasing, ferrous scrap, in contract to finished steel, is expected to firm over the May–July period. By July, they’re looking at a $190/ton market for Chicago HMS (heavy melt scrap)– that’s a 48% climb from April. As noted, sources believe we’re already at $190 with No.1 bushelings at $225-$230/ton.

Others are also certain that prompt material, in particular, will continue to ratchet higher going forward; it’s just not being generated. Add to that the Chrysler 30-plant shutdown, and that may last some 30-60 days, the time it takes to restructure. GM is also planning a 13 assembly plant multi-week shutdown in mid-May. In sum, low scrap availability combined with domestic mill and foundry buying (albeit, modest) and a very competitive export market will underpin the raw material side of the equation. As concluded by GFMS, “…we do think that April will be the bottom of the scrap market…”

Looking at Nonferrous: The copper market received a lot of attention at our convention’s Copper Spotlight session–with speakers expressing doubts that what we’ve seen so far this year on the LME and Comex can be sustained.

Neil Buxton, GFMS Metals Consulting, said, flat out, that the fundamentals do not justify the increases we’ve seen so far this year. Spot Comex, for example, has increased from $1.3950/lb on 12/31/008 to $2.1015 as of 05/01/09. Most agreed that, for now, it’s all about China, its SRB and scrap tightness.

His price forecast? Over the next eight months, Buxton sees copper trading between a low of $1.50/lb and a high of $2.25 for an average of $1.75 for the full year. He’s looking at a $2.50/lb average for 2010.

Meanwhile, in the trenches, copper scrap supply remains very dear to those buying as reflected in the tight “aggressive” spreads we’re seeing. No.2 is quoted at minus 7 cents to –minus 12 cents, f.a.s., basis July/Sept. with burnt No.1 at or near level Comex and Bare Bright commanding a premium that’s almost the same as for cathode (?!) Domestic consumers confirm that most of the strength that we’re seeing is directed to export side…

Copper radiators heading to Midwest ingotmakers ranging from the low $1.60s to the mid and upper ranges of $1.60/lb, delivered; red brass in the mid-$1.70 region, with China said to be “running the show,” scrap is far firmer than the corresponding domestic ingot market.

Back to our Convention: Speakers at our Aluminum Spotlight offered very conservative outlooks for aluminum based on negative demand prospects matched against the conspicuous overhang of primary metal. John Tumazos, Very Independent Research, said he’s forecasting LME cash to average 63¢/lb this year and 70¢ next year. William Adams, Basemetals.com, is looking at an average this year that’s closer to 59¢/lb. Last year, LME cash averaged $1.17.

Latest on the domestic market for aluminum scrap finds limited demand from the diecasters and a ready supply of scrap…current indications place old sheet and cast at 41¢/lb and 43¢/lb, respectively, with painted siding at 45¢/lb and MLCs at 49¢/lb, delivered Midwest. 380 alloy is said to be commanding

delivered prices in the “high” 60s¢/lb /lb as secondary aluminum smelters lament the poor business environment…

Robin Bhar, Calyon, offered forecasts for both lead and zinc at our animated Lead & Zinc Spotlight session. As for lead, he sees LME cash averaging 49.9¢/lb this year along with a global refined surplus of 160,000 metric tons, far greater than what the ILZSG is forecasting. Zinc, meanwhile is expected to average 54.4¢/lb also along with a larger global surplus than was recently estimated by ILZSG (>260,000 metric tons). Spot lead and zinc are up 42% and 56%, respectively, since the end of 2008; last year, LME cash lead and zinc averaged 95¢/lb and 85¢/lb, respectively.