The ‘Great Recession’ is over, so Q4 steel prices won’t collapse

Just in case you missed it: “The Great Recession is over,” according to the National Association for Business Economics’ latest survey, taken Sept. 2-Sept. 24. The survey of 44 professional forecasters found that 80% of the respondents believed the U.S. economy was expanding after four straight quarters of decline. The survey also predicted that gross domestic product (GDP) will grow at a 2.9% pace in the second half of this year with next year’s GDP expected to average 2.6%.

The labor market remains a concern, however, with unemployment expected to hit 10% in the first quarter of 2010 before moderating to 9.5% by year-end 2010. As concluded by our good friend and NABE president, Lynn Reaser: “The good news is that this deep and long recession appears to be over, and with improving credit markets, the U.S. economy can return to solid growth next year without worry about rising inflation.” Nice.

Wednesday’s retail sales fell in September with autos declining 10.4% as the “Cash for Clunkers” program took auto sales from October and perhaps the next couple months. Today’s “core” retail sales (retail sales ex-autos, building materials and gas) were up 0.5% from last month and are up in 3 out of the last 4 months. To some, this is proof that consumers have been spending, despite what the conventional wisdom has been saying.

In the ferrous universe, looking at steel’s big picture, the World Steel Association raised its 2009 global steel demand forecast by 8% this week from 1.019 billion metric tons to 1.104 billion, but still a decline of nearly 8.6% as compared to the original forecast of down 14.1% made in the spring. WSA is now expecting steel demand to grow in every region in 2010, with demand rising 17% in NAFTA - including +19% in the U.S.

The upward revision was mainly due to much higher than originally expected steel demand in China, which is now forecast to grow nearly 19% to 526 million tons this year versus an initial estimate of a 5% decline. Furthermore, WSA forecasts global usage (defined as domestic shipments and imports) will improve 9.2% in 2010 to about 1.21 billion metric tons-about the same as 2008.

And speaking of China, the China Iron and Steel Association (CISA) announced that the country’s average daily steel production for the month of September was 1.693 million metric tons, or approximately 618 million metric tons on an annualized basis. Last month, China produced 616 million metric tons of steel on an annualized basis, while in the similar month in the year ago period the country produced 482 million metric tons of steel on an annualized basis-a record pace despite a significant decline in Chinese steel prices over the last two months.

As reported by Steel Market Intelligence, steel demand in China is increasing on the back of the country’s steel intensive stimulus plan. At the same time, statistics show that Chinese steel inventories are now at record-high levels and steel exports recently surged some 15% in August, meaning that the massive amounts of steel being produced is not being consumed at the same pace. Their view is that exports will likely continue to provide the “safety relief valve” for the high-cost Chinese industry.

Closer to home, Steel Business Briefing is reporting its domestic f.o.b. reference price for hot-rolled sheet in coil was down $9 week-on-week to $551/net ton, off $9 from last week and $26/ton lower over the past month. They say that’s well below current mill offers of around $570-$580/ton. An SBB source believes that HRC “…will fall to around $450/ton by year end.” Others, of course, disagree.

While acknowledging some downside price risk in the final months of the year, partly as a result of lower usage from the automotive sector, the consensus outlook is not looking for a fourth quarter price collapse.

Platts is reporting its Midwest HRC reference price at $535/ton, with an indicated range of $520-$550, that’s down $20/ton from a week ago. Steel Market Update, meanwhile, is showing a $530-$570 range-a bit higher, but it also noted that they could not find any mills collecting $600/ton. The trend, they believe, is for “…lower prices over the next 30-60 days.”

As for ferrous scrap, press reports have ferrous scrap prices around $20/gross ton, which is $30/gross ton lower than a month ago, with little current support from off shore buyers. World Steel Dynamic’s “SteelBenchmarker” is reporting No.1 HMS at $237/ton, delivered, with shredded at $257/ton, and No.1 bushelings at $290/ton. This week’s Scrap Price Bulletin is showing Chicago bushelings @ $302.50/ton delivered. Current export prices for shredded are “around $260/tonne f.o.b.,” according to GFMS.

In the nonferrous complex, a number of analysts are delivering reports and projections during LME week.

The executive director of J.P. Morgan’s Commodities Group, speaking at the LME seminar, projected aluminum to average 84¢/lb next year, following this year’s average figured at 73¢/lb. J.P. Morgan’s latest seems pretty much in line from what we’re hearing from others who are also calling for a low-to-mid-80-cent average next year, with a low (so far) from Goldman Sachs (78¢) and the high from Calyon ($1.04.) CRU is also thinking that for 2010 that “the most likely price now falls in the range of $1742/metric ton (79¢/lb) to $1764/mt (80¢/lb.)” Davenport & Company is looking at a range of 82¢-86¢/lb next year.

Calyon is also bullish on copper, with relatively tight refined supplies providing fundamental support. The firm is looking for LME cash to average $2.88/lb this quarter, and $3.40/lb for all of next year despite the International Copper Study Group’s latest report that calls for a growing global statistical surplus due to an expected fall in demand

and an increase in refined supply (?). Chile’s Cochilco, meanwhile, see an average next year closer to $2.68/lb. A recent Reuters survey of 28 analysts came up with a $2.93 consensus average for 2010.

As for lead, zinc, nickel and tin in 2010, Barclays Capital is forecasting cash lead at 94¢/lb, zinc at 95¢/lb, tin at $7.82/lb and nickel at $9.75/lb.

As we’ve stated before, Chinese copper imports are closely watched as a generalized base metal barometer and the September figures did not disappoint after having declined in July and August. China imported 399,000 metric tons of unwrought copper in September, 23% higher, month-on-month, and 87% higher year-on- year-which is way ahead of expectations. The early take on this is that underlying copper consumption in China is much stronger that thought.