In the recovering economy, commodity prices remain unpredictable

The third quarter ended this week, as did the U.S. government’s fiscal year with some projecting a deficit of some $1.5 trillion. Wall Street is expecting some big earnings to be announced in the weeks ahead, so we’re expecting the Dow and the S&P to react accordingly, despite this week’s heavy-duty selling. Will we soon see the Dow at 10,000? And what does that threshold really mean? We’ve been there before; the first time was March 29, 1999. That long ago?

As for Tuesday’s lower-than-expected Consumer Confidence number for September, Briefing.com, for one, notes that consumer sentiment indices get way too much attention. Sentiment, they point out, doesn’t correlate strongly with consumer spending and, thus, has little predictive value since it reflects well-known factors such as unemployment rates and gas prices more than it predicts future spending patterns. August consumption actually increased 1.3%, versus a consensus expected gain of 1.1%.

Yesterday’s ISM (Institute of Supply Management) Index was reported at 52.6%. Although the rate moderated last month, the index also showed that the recovery has broadened with the increased number of industries reporting growth. The index also showed that the overall economy grew for the fifth consecutive month. The most troublesome component, however, is the ISM Employment Index that posted its 14th consecutive monthly decline. As we’ve noted before, the ISM Index is a survey of purchasing managers; it’s not hard data of any kind, but simply a reading that provides broad indications of trends.

As we also pointed out last month, global PMI numbers were equally encouraging in a number of countries. China and Japan posted readings above the 50 threshold while the numbers were a bit more mixed in Europe, where France and Germany continued to improve while the U.K. and Italian manufacturing sectors “stumbled slightly,” with August PMI’s lower than July’s.

We’re also reminded that the Conference Board’s Index of Leading Indicators rose 0.6% in August, the fifth straight monthly increase. The July number was also revised upward. The OECD (Organization of Economic Cooperation and Development) composite leading indicator has also increase over the last 2-3 months indicating that global economic activity should accelerate strongly into the fourth quarter and through the first quarter of 2010.

London-based GFMS reminds us, however, that the major OECD economies will remain below their previous levels through that period, but nevertheless, “the clear indication is that by the second half of 2010, we could be in an expansionary territory…” meaning a much faster economic recovery than expected.

Today we’ll get a look at employment, and for some, there’s reason for optimism despite Wednesday’s disappointing ADP employment figure. Our friends at Navellier, for example, noted that first-time unemployment claims declined 21,000 to 530,000 last week — the lowest level since July 11th and the second lowest reading in a year…the four-week moving average of new claims fell by 11,000 to 553,500, the lowest level since January. (Editor’s note: Unfortunately, job cuts accelerated in September as employers eliminated 263,000 positions, more than expected and higher than August’s revised 201,000 cuts. And, in a further sign that labor-market pain is unlikely to end soon, a separate survey showed the unemployment rate rose to 9.8%.)

In the ferrous world, an interesting report this week from Goldman Sachs talks about “tactically downgrading” their earlier view on U.S. Steel now that GS is less sure that U.S. Steel will achieve $600/net ton for HR (hot-rolled sheet) for October/November delivery…in fact, “…prices,” they believe, “could even recede over the coming months.”

This pretty much confirms what others have also been saying. Last week, for instance, we also reported that prices could very well consolidate at current levels or even reverse direction based on tepid demand from manufactures, and the belief that lower global steel prices and increased Chinese exports to other Western markets will negatively influence prices here. For all of September, Purchasing placed the spot HR average at $535/ton, up from $475/ton in August.

Goldman Sachs goes on to note that seasonal considerations could pressure the company to revisit the $520/ton - $530/ton range over the coming months (by February 2010, that is) as supply exceeds demand. It now looks like they’re looking at the second quarter of 2010 for prices to again trend higher.

Morgan Stanley believes that domestic mills will try to price out imports by lowering prices to ~$550/t from $580/t by year-end. The current spot market for domestic HR is figured around $555/ton, Midwest market, f.o.b., according to Platts and Steel Market Update. SBB is reporting HR at $554/ton this week, with mills offering material at $570/ton - $580/ton, down from “around $600/ton in recent weeks.” Steel Market Update is more direct in its assessment of HR…their latest survey places the bulk of business between $540/ton - $580/ton with “…the price trend is for prices to move lower over the next 30-60 days.” As they see the current market for HR, they believe it’s not a strong product and the supply is more than adequate.

As for ferrous scrap, this week’s Scrap Price Bulletin has its No.1 HMS composite price unchanged at $255.17/gross ton delivered, with shredded at $287.50/ton and Chicago bushelings at $337.50/ton. World Steel Dynamics’ “SteelBenchmarker” has its No.1 HMS reference price at $252/ton with shredded at $282/ton, and No.1 bushelings at $319/ton. The guess for October is that HMS will take a modest downside hit, something more than a “sideways” market with shredded and cut grades look especially vulnerable. Platts is reporting shredded scrap in a $277-$285/ton range, $10/ton lower.

In nonferrous, we’ve been experiencing some push back over the last couple of weeks. Any discussion on price trends, however, must also include China and its influence on all base metals, especially copper.

A lot of attention in the past week is on the latest August import figures, and while again lower, refined copper imports are still up significantly cumulatively year-on-year. Year-to-date August refined copper imports were 2.3 million metric tons vs. 860,000 over the same January-August period of 2008. And while there was certainly material earmarked for later use, around 600,000 metric tons by some estimates (includes SRB purchases of 250,000 tons,) private stockpiles represent a relatively small portion of Chinese copper consumption that could be as high as 5.9 million metric tons this year.

Analysts are expecting to see lower imports in the months ahead but this, they say, is not a true reflection of lower Chinese copper demand or consumption. Some more bearish reports, however, hint at large “hidden” stocks of metal held by Chinese merchants/traders/speculators and consumers but, as observed by Barclays Capital this week, “…exaggerated claims about hidden Chinese copper stockpiles surface regularly…” Time will tell…

Closer to home, copper scrap is generally termed “tight” but basically in balance, given the consumption patterns we’re seeing: Benchmark No.2, for example, is quoted at 32¢ - 33¢ cents under December with burnt No.1 at 22¢ under, and bare bright closer to 10¢ under, pretty close to what Platts reported as averages for all of September.

Midwest ingot makers are quoting closer to 40¢+ under December for No.2; red brass at either side of $1.90/lb and yellow brass in the low $1.70s and copper radiators placed in the upper $1.60 range, delivered.

Back in the trenches, the latest aluminum price forecasts from Harbor Intelligence reckons that as an annual average, after thinking of upside and downside potentials along with what’s termed a “realistic” forecast, the firm has this year’s London Metal Exchange (LME) cash averaging at 75¢/lb, with 2010 figured at $1.04/lb. Harbor still contends that aluminum could hit $1.09 by the end of this year. Year-to-date, LME cash has averaged just under 70¢/lb.

Davenport & Company is much less certain of an end of the year spike and sees a “range-bound” aluminum market through year-end. Their latest forecast for this year works out to be 74¢/lb with 2010 forecast to average 84¢/lb. The overhang of idled capacity, they maintain, “should keep a lid on prices through most of next year.” On a brighter note, 2010 domestic shipments are forecast to rebound 8% to 18.7 billion pounds, following the largest drop in aluminum shipments since 1975 and the third annual decline in a row.

As for aluminum scrap, Midwest secondaries are quoting in the mid-50¢ range for old sheet and cast, delivered, with turnings in the low 50¢ range…painted siding at 56¢-57¢ cents with MLCs at 60¢. Alloy going out the door was pegged in the upper 80¢ cent range, delivered.

Moving onto stainless steel, data revealed higher second quarter global output-up 24.5%–but world production is still some 27% lower comparing the first-half of this year with last year. China continues to set the pace with output reportedly up 5.3% year-on-year to 4.1 mmt. As noted by the ISSF, China accounts for almost  40% of global stainless steel production.

Higher second quarter production suggests to some that a bottom may have been reached for this segment of the metals industry and that, in turn, should support LME nickel prices as well as 18/8 stainless steel scrap. At the same time, however, Macquarie Research reported just this week that Chinese mills have announce production cuts for September/October, reflecting lower stainless prices and increased inventories among distributors.

Those closest to the domestic market confirm that the recent flurry of activity on the production side is coming from the service centers, not from end users. The current wholesale scrap market, meanwhile, is figured in the low to mid 70¢ range with little in the way of price pressure from offshore buyers.