Has a metals-related economic recovery actually begun?

A closer look at the metals-intensive manufacturing component of April’s Industrial Production report shows that while the overall index fell by the smallest amount in six months, providing evidence that the pace of the decline is slowing, it’s far from positive. Manufacturing fell 0.3% and the factory operating rate dipped to 65.7%, the lowest on record dating back to 1948. First Trust Advisors, however, sees the inventory correction ending by mid-year, at which point IP, they say, will turn upward. Their forecast calls for a recovery starting in this month.

In other macro news this week, April housing starts and building permits numbers were disappointments with declines from March of 12.8% and 3.3%, respectively. At the same time, however, it’s worth noting that single family housing starts bottomed in January, were unchanged in February and have now increased for two months in a row. Still, housing and autos remain the conspicuous weak links in this domestic economic recovery that’s supposedly underway. There’s that, of course, and unemployment.

As for ferrous scrap price indications, our friends at Steel Market Update were showing No.1 HMS (heavy melt scrap) at $195/gross ton, delivered; shredded at $215/gross ton and No.1 bushelings at $230/gross ton as last week ended.

This week, Scrap Price Bulletin is showing No.1 HMS composite at $188.50 along with its No.1 dealer bundle composite at $211/ton. And for the month of May, RMDAS is looking at No.1 HMS @ $188/ton, shredded at $214/ton and prompt scrap (No.1 bushelings, No.1 bundles, and No.1 factory bundles) at $229/ton.

On the finished steel side, Platts again lowered its Midwest f.o.b. HR (hot-rolled sheet) coil reference price this week to $385/net ton. Steel Market Update sees this negative price trend continuing “…over the next 30 days.”

Most published sources place the current spot HR transactions in a $385-$402 range.

This view follows the latest service center report from April that showed that cumulative shipments are off some 43% compared to a year ago, and inventories are lower by some 35% from their August ’08 peak.

And while these latest figures on inventory and shipments are eye opening, the ratio still suggests that destocking has not yet run its course. Michelle Applebaum, for one, sees the potential for another 20% drop in tonnage in order to restore a more familiar balance between the two. It’s difficult to see much improvement in shipments with auto shutdowns looming.

The latest from JD Powers only adds to the pessimism since the firm is forecasting North American light vehicle production of 8.593 million units this year, down 32% from last was which was also lower by 16% compared with 2007…gads…this, they say, also translates into 4.2 million less steel needed this year…gads, again. Also interesting is that at 8.5 million units produced, that’s about 3 ½ million units less than is scrapped in a year.

In the nonferrous market, London Metal Exchange (LME) aluminum inventories vaulted past the 4 million metric ton mark on Monday, increasing by another 123,550 metric tons and representing some six weeks of consumption. Not all that surprising, aluminum remains the price laggard on the LME so far this year, and by a lot. Cash lead, copper, tin, zinc and nickel are all up ranging from +50% (lead) to +13% (nickel.) In contrast, LME cash aluminum is currently down 3%, ending last year at 66¢/lb.

Aluminum inventories, meanwhile, are up some 70% since the start of this year. As reported in Scrap magazine’s “Marketrends” column (May/June 2009): “…most believe that chronic excess global capacity in aluminum smelting, matched against modest demand prospects, remain longer term obstacles to a sustained price recovery in 2009.”

A more recent report from Barclays Capital called last month’s firming trend a “dislocation between price performance and the fundamentals.” As an average for this year, Barclays sees cash LME aluminum at 65¢/lb.

Closer to home, secondary aluminum smelters report a nearly catatonic market for alloy along with lower average aluminum scrap prices. Reason: Secondary smelters are reluctant buyers since alloys sales are few. As explained: “Every pound I buy only adds to my long position…” Latest indications place the Midwest market for old sheet and cast at 40–42¢/lb, delivered; painted siding at 43-44¢, and MLCs (mixed low copper clips) at 46¢. The 380 alloy market is placed in the mid-60¢ delivered.

As for copper scrap, the crazy numbers we were hearing a week or so ago have settled down now that China has backed off; nevertheless, scrap prices are still relatively firm and scrap supply remains very tight with low generation and low collection of obsolete material keeping spreads from widening out given the tepid domestic demand we’re seeing.

Latest ILZSG (International Lead Zinc Study Group) news releases for the first quarter of ’09 have both lead and zinc recording larger than expected surpluses. For lead, global supply exceeded demand by 33,000 metric tons although Barclay Capital reckons that lead’s surplus was closer to 100,000 tons after adjusting for assumed stockpiling.

As for zinc, the surplus was pegged by ILZSG at 187,000 tons. ILZSG also noted that reported zinc stocks increased 225,000 tons including the 109,000 tons that went to China’s SRB (State Reserves Bureau). For the full year, Macquarie Research is forecasting a 364,000 ton zinc surplus that also includes SRB purchases.

Latest INSG (International Nickel Study Group) data is showing global nickel consumption was lower by some 25% this first quarter vs. the same quarter of 2008. Mine and refined supply were also lower over this same period but the supply/demand balance was figured at +49,000 metric tons. INSG noted that LME nickel inventories have increased by 45% over the first quarter.