Recession is over but economic indicators remain mixed

This past week’s economic releases were generally constructive, highlighted by better-than-expected industrial production (IP), retail sales, and residential construction figures. Less favorable numbers were July business inventories that fell, along with a higher-than-expected producer price index (PPI) and consumer price index (CPI) numbers for August and lower-than-expected sales of big ticket orders.Last week’s Commodities Forum that we hosted in Chicago also featured a special session on the U.S. and Global economy. Bill O’Neill of LOGIC Advisors moderated the Tuesday session and led off with some positive economic indicators that were released that very morning, including August retail sales (up 2.7%); the PPI for August (+1.7%); and July’s business inventories (down 1.0%.) O’Neill also quoted Federal Reserve Chairman, Ben Bernanke who, in responding to a question at the Brookings Institution meeting on that Tuesday, remarked that, “From a technical perspective, the recession is very likely over at this point.”

Panel members were in general agreement concerning positive GDP growth going forward but the speakers also highlighted a number of “red flags” that could alter the shape of the current economic recovery. Speakers John Groesbeck, Westminster College, and Patrick Newport of IHS Global Insights, specifically cited concerns over the size of household debt, the still-rising unemployment rate, the temporary nature of restocking of depleted inventories, on-going banking failures, relatively high crude oil prices, and the negative influence of non-residential construction as potential drags on the economy.

As for a GDP forecast, Newport said he was looking at 3.7% growth for the third quarter, followed by a 2% GDP rate in the fourth quarter of 2009. The U.S., he said, will then “bounce along” that 2% annual rate into 2010. Full recovery, he said, will have to wait till 2011 - 2012. Global economic recovery, noted Groesbeck, will be paced by China, India, and Brazil. Russia, he believes, will be the laggard of the so-called BRIC economies.

On a final macroeconomic note, the FOMC met on Wednesday and voted 10-0 to maintain the Fed Funds Rate at its current level between zero and 0.25%, further noting that we can expect the rate to remain at exceptionally low levels for, “an extended period of time.”

Now to the ferrous market where, as reported by the World Steel Association (WSA) this week, last month’s global crude steel production was placed at 106.5 million metric tons,

5.5% lower than August 2008, but steel production has continued to show a steady increase since April 2009. For the first eight months of ‘09, production reached 759.5 million metric tons, an 18.1% decrease over the same period of 2008. Annualized, we’re looking at 1.25 billion million metric tons of steel this year-down from 1.33 billion in 2008. Yipes!

China continues to dominate global output: August production was 52.3 million metric tons, 22% higher than August ‘08– the highest amount of crude steel China has ever produced in a month. The U.S., meanwhile, produced 5.2 million metric tons last month, a decrease of 40% compared to the same month last year. Through

August, domestic production was figured at 34.5 million metric tons, down 49.4% compared with last year.

Closer to home, the latest domestic service center shipments for August show shipments were slightly higher than July with steel inventories again figured lower at 2.2-month’s supply - an all time low, according to analysts. And while the reported data suggests justification for the current uptrend in finished steel prices, not all are convinced that the “trend is a friend” and that the market may, at the very least, consolidate at current levels or even reverse direction based on tepid demand from manufactures and the belief that lower global steel prices will negatively influence prices here.

On a pleasant note (somewhat), the American Iron and Steel Institute’s most recent data shows that production and capacity utilization both increased for the thirteenth consecutive week. Production was up 0.9% to 1.386 million metric tons for the week ending September 19th, while capacity utilization was 58.1%, up from 57.5% the week previous. Both are the highest they have been all year.

Regarding U.S. and global steel prices, last week World Steel Dynamic’s “SteelBenchmarker” placed the domestic the hot-rolled sheet spot price at $551/net ton, up $37/ton from the previous week. Platts.com is reporting $550 for the U.S. market.

The Chinese HR ex-works price was figured at $437/metric ton ($396/net ton) - that’s lower, and SteelBenchmarker’s world export prices was reported at $551/mt, up slightly from three weeks ago.

Putting this all together, and as observed by Michelle Applebaum Research, absolute and relative domestic HRC prices continue to increase with recent price increases that have now lifted U.S. prices above both European and Chinese prices, but remain below Japanese prices. But given transportation costs and tariffs on Chinese hot-rolled sheet, her firm notes that they do not expect Chinese exporters to start targeting the U.S. market.

Speaking at last week’s ISRI Ferrous Roundtable, Mark Millett of OmniSource observed, however, that Chinese steel imports were “on the cusp” of being attractive to domestic buyers. At the same time, he also described the current pricing environment as “fragile” and that the $600/ton HR price for November announced by U.S. Steel last week “may soften.”

For clues to near term pricing trends, we’ll be keeping a sharp eye on the Chinese steel market as well as the level of domestic steel imports and exports over the next few months plus spot iron ore prices and seaborne shipping rates. Preliminary August steel imports, by the way, fell a surprising 13% to 854,543 tons from 984,577 tons in July, the lowest level we’ve seen since February 1993.

Moving on: As for the latest on ferrous scrap prices, this week’s Scrap Price Bulletin is showing its No.1 HMS (heavy melt scrap) composite price at $255.17/gross ton, delivered, with shredded at $287.50/ton, and its Chicago bundle price figured at $337/ton - $338/ton. RMDAS placed its September average for No.1 HMS at $270/ton, with shredded figured at $294/ton, and its No.1 bundle and busheling composite price at $339/ton.

As for a near term outlook, our friends at Canaccord Adams are looking at the potential for bushelings to reach the $400/ton level “within the next several months” given what they see as a fundamentally tight scrap market, especially for prompt material.