Mid-month macroeconomic indicators are confusing?

A nervous start to the new week with base metals heavily sold as the dollar firmed and macro-economic confidence wilted. Midweek prices on the London Metals Exchange were lower across the board, looking tired technically and fundamentally.

The Conference Board’s leading indicator for May posted its biggest increase since March 2004 but May’s industrial production report was a major disappointment–so macro-economic confidence wilted this week and surprisingly weak New York State manufacturing data added to the uncertainty.

Still, last month’s housing figures, led by multi-unit starts, were a pleasant surprise, exceeding most economists’ expectations. Housing starts were up 17.2% to 532,000 units at an annual rate and were up in every major region of the country. Looking closer, single-family housing starts have increased for three straight months and are up 12.3% since the low earlier this year. Further, permits to build single-family homes increased for the third time in four months and are up 19.3% versus the January low. We’re reminded, however, that there are still excess inventories in the housing market, but the assumption is that inventories will continue to fall rapidly even as housing starts recover.

On the inflation front, other than higher energy, we’re not seeing much - yet. May’s PPI increased 0.2% vs. a consensus expected 0.6%. The “core” PPI, which excludes food and energy, fell 0.1%. The other inflation indicator, the CPI, increased 0.1% versus a consensus expected gain of 0.3%; it’s down 1.3% vs. a year ago. “Core” prices, which exclude food and energy, are showing some movement upward in the underlying trend, up at a 2.3% annual rate in the past three months vs. a 1.5% rate in the three months before that, and a 0.6% rate in late 2008.

And while confidence in the nonferrous arena is definitely taking a hit so far in June, it seems just the opposite for ferrous markets and general, and carbon steel in particular.
Most recently, our friends at Canaccord Adams have taken a more positive stance on the domestic steel industry, citing a few “positive trends” that include higher production (seven consecutive weeks) and utilization rates (47.7%) that they believe is suggestive of an initial recovery within the steel industry.

At the same time, however, the higher steel production that we’re now seeing has probably as much to do with inventory restocking as opposed to a real pickup in demand. Service center steel inventories, for example, are at lows dating back more than two decades. Still, the fact that scrap prices did not decline in June also supports their (bullish) contention. And, as the economic climate improves going forward, mills, they say, could face a supply squeeze given their low levels of scrap inventory.

Latest published reference prices for Midwest hot-rolled sheet in coil have all moved up. Platts’ midpoint price this week was placed at $395. Lead-times have also moved out to around four weeks, we understand. ArcelorMittal and Severstal, meanwhile, have lifted HR list prices to $460/ton from $410 earlier this month, effective immediately for all new orders. The current range for HR prices, notes Steel Market Update, is $380-$430/ton.
Looking ahead, KeyBanc Capital Markets is projecting an average HR price of $500/ton for this fourth quarter.

And then there’s China…to the surprise of some and the dismay of others, May crude steel production figures were the second highest output ever, very close to China’s all-time monthly high set back in June ‘08. Ever-higher production, coupled with new export tax rebate incentives, sure suggests to some that more steel will be available on the international markets and that could add pressure to all consuming regions. Last year, China was a small net importer of steel and while still a small net exporter so far this
year, China was a net importer of finished steel in April and May.

Yep, it’s all about China. Speaking of which, the World Bank raised its growth forecast for China this year to 7.2% in 2009, up from 6.5% forecast in March.

As for ferrous scrap, Platts is also showing firmer scrap prices with shredded scrap at $205/gross ton, delivered Midwest. Scrap Price Bulletin’s No.1 HMS (heavy melted scrap) composite is unchanged at $184.50/ton, delivered, while shredded scrap was figured at $211.17, and Chicago dealer bundles were placed at $214-$215/ton. Not all that surprising, the buzz for July is for higher scrap tags.

As we noted above, market confidence at mid-year appears to be shifting from nonferrous to ferrous, especially with growing concerns that Chinese restocking for key base metals may be drawing to a close. Rumors are also circulation that the China’s SRB (State Reserves Bureau) is now selling some metal back into the market. Even with the expectation that certain base metals are ripe for a pull back that may well be categorized as a trend reversal, few see this correction as anything but short-lived.

Goldman Sachs, for one, is moving to a “much less cautious stance” with respect to certain metals, convinced that a global economic recovery is at hand. At the same time, their analysts do see a fundamental weakness over the summer months but any pullback, they maintain, will be relatively small given their longer term view for metals, especially with regard to emerging market growth patterns.

Their 12-month target for copper calls for a $2.18/lb price, moving to $2.63 by year-end 2010. For perspective, LME cash copper has averaged $1.80/lb so far this year.