Metals are "wobbly" as global economy could be weaker for longer

A ragged start to the new week with London Metal Exchange (LME) base metals hammered on Monday as the dollar firmed and economic uncertainty dominated sentiment…several base metals hit multi-week lows along with the ever-growing conviction that prices have clearly outpaced the fundamentals. Mid-week sentiment, however, was buoyed as the dollar weakened early, but to some, the base metals complex looks “wobbly” at best.As widely reported, the latest from the World Bank suggests to them that the global economy will remain much weaker longer, taking issue with the view in some circles that renewed global growth is at hand. Economic growth, the Bank warned, is expected to be negative in 2009, with an expected global contraction placed at 2.9%, rebounding to 2% in 2010.

As for the U.S., the final first quarter GDP came out yesterday at -5.5%, a bit better than the previous two guesses for the first quarter, and a whole lot better than the final months of 2008 (-6.3%)

In other macro news this week, May existing home sales increased 2.4% to an annual rate of 4.77 million units, slightly below what the consensus expected, however, sales have increased for the third month in a row and are now 6.2% above the low set in January. The two-month percent increase in sales is the largest since April 2004.
New home sales for May, however, disappointed but sales were still above the January low…yep, the inventory correction continues.

Offsetting Wednesday’s housing news was that durable goods orders increased 1.8% in May, beating the consensus expected decline of 0.9%…this marks two straight months of increasing orders for durable goods, and three increases in the last four months. The two weakest areas were motor vehicles/parts and fabricated metals.

No surprise this week that the Fed kept interest rates unchanged at 0%-0.25%. “Until the Fed sees the unemployment rate falter, its propensity to do anything other than hold rates steady is close to nil,” so opined our friend Dennis Gartman at The Gartman Letter.

As for ferrous news, global raw steel production inched up in May compared with April, but for the first five months remains 22% below where it was over the January-May 2008 period…and while the rest of the world is posting production negatives, China’s output, so far, is slightly ahead, up 0.4%. China’s apparent demand for steel is figured to have increased 8.4% year-on-year, presumably driven by infrastructure investment…

Macquarie Research is forecasting total Chinese production to reach 540 million metric tons, compared with 500 million metric tons last year. Amazing…and worrisome at the same time when matched against other forecasts that see Chinese steel demand this year at closer to 480 million metric tons. Exports, anyone?

The U.S. market for ferrous scrap, meanwhile, is “showing signs of stability,” according to a recent CMC market commentary, while also crediting offshore demand as currently the “best markets” for ferrous scrap compared with weak domestic demand and an “even weaker supply with a suffering manufacturing base.”

Scrap sentiment going into July remains encouraged with the domestic market setting the tone as opposed to exports, according to our sources…market participants believe the market is responding to assumptions that flat rolled steel demand and prices are responding to marginally improved short term fundamentals: a pick up in orders; declining inventories; low imports (May imports fell below 1 million metric tons) and
depleted supplies of prepared scrap. Whether this momentum can be maintained in the months ahead is, of course, key.

For the month of June, RMDAS reference prices for No.1 HMS was figured at $190/gross ton…shredded was placed at $217/ton, and their prompt industrial scrap number was $226/ton. Compared with May, prices were little changed with prompt scrap lower by $3.00/ton while No.1 and shredded scrap gained $2.00/ton and $3.00/ton, respectively.

As widely assumed, July will feature higher numbers for both hot-rolled sheet and scrap along with some pretty strong opinions regarding the response from buyers and consumers of finished steel.

In nonferrous, the annual UBC (used beverage container) survey that ISRI, the Aluminum Association, and the Can Manufacturing Institute jointly survey is just about finished and it looks like the 2008 UBC recycling rate will eke out a modest gain over the 53.8% recycling rate reported for 2007. Fewer cans were collected last year but even fewer new cans were shipped…UBCs earmarked for export, meanwhile, showed a dramatic increase, more than doubling from 16.2 million lbs in 2007 to more than 35.4 million lbs last year.

May Chinese copper import figures crated a bit of a stir as last week ended…refined imports rose 354,567 metric tons, up some 105% from year ago levels, setting records for the fourth consecutive month…and yet, copper scrap imports were lower by 40% and apparent copper consumption was lower by 3½% compared with April.

There’s a lot of funny numbers along with mounting evidence that China is oversupplied with cathode. Analyst Simon Hunt reckons, for example, that there’s a surplus of 635,000 tons of refined copper sitting in China, accumulated over the January-April period and held by hedge funds, merchants, Chinese financial institutions, fabricators, “…that have nothing to do with copper.” He’s also of the opinion that China’s GDP in 2009 will be about half the official estimate of 8%-8½% growth. Others have also speculated that China’s SRB (State Reserves Bureau) is, in fact, now selling some of its stockpile adding another level of uncertainty to the marketplace. But if there is SRB selling, who’s buying and why?