Mixed economic news has metals markets searching for direction

Base and precious metals were off and running as the week began, initially spurred on by the weak dollar, positive expectations concerning global economic growth, and even bad Chinese weather. Wall Street, meanwhile, was also encouraged by October’s retail sales along with Ben Bernanke’s remarks on the U.S. economy and to “… ensure that the dollar is strong and a source of global financial stability.”

Commodity Exchange (Comex) December copper added more than 13¢, closing at $3.107…December gold posted a fresh all-time high, ending the day $1,139.20/troy ounce, up $22.50. Mid-week markets going from strength to strength as the dollar goes from weakness to weakness. Comex copper paused on slower-than-expected housing numbers but still managed a modest 20-point gain, closing at $3.1105. Wall Street took a bit of a breather, looking for fresh direction.

Now, it’s Friday morning and the London Metal Exchange is mixed but moving slightly negative in the absence of fresh macro news. London gold was last indicated at $1,140, and said to be held in check by a slightly firmer dollar. Traders are looking for Comex copper to open slightly lower for the December contract, which closed Thursday at $3.081/lb.

Monday’s much better-than-anticipated October retail sales provided a nice boost to the market with overall sales up 1.4%. Much of this was attributed to auto sales, post “cash for clunkers,” but the 0.5% gain in “core” sales was also higher for the third straight month. Overall retail sales, however, are still down 1.7% versus last year.

Tuesday’s Industrial Production figure for the month of October, however, offered a more sobering picture of the U.S. economy as production increased a tepid 0.1% after having averaged monthly gains of about 0.9% over the previous three months. Most disappointing was the Manufacturing component that declined 0.1% in October after having risen in each of the previous three months. The decline was mostly traced to lower auto output. The factory operating rate showed no change from its September level of 67.6%. Total industry capacity utilization moved up 0.2 percentage points to 70.7%, a rate that’s 10.2 points below its average for 1972 - 2008; capacity utilization for manufacturing was unchanged at 67.6%.

In other major macro releases this week, housing starts fell 10.6% in October to 529,000 units at an annual rate, well below the consensus expected pace of 600,000. That’s the same with permits that declined 4.0% in October, also below consensus. Single-family starts declined 6.8% and multi-unit starts fell 34.6% in October to the lowest level in at least 50 years. Housing had shown some recovery as overall home building increased in the third quarter of ‘09, for example, but this latest report threw a bit of cold water on this very important segment of the U.S. economy.

On the inflation front this week, headline CPI rose more than expected in October with “core” running close to 3%. October’s PPI, meanwhile, increased 0.3%. Although seemingly tame, prices are up at a 4.8% annual rate in the past six months. Deflation seems remote for the U.S., strongly suggesting that monetary policy should be adjusted accordingly. But it won’t be.

In the ferrous world, first, some big picture numbers: Latest from the World Steel Association has global steel production figured at 112 million metric tons for October, bringing the cumulative total for the first ten months of 2009 to 982 million metric tons, a 13.5% decrease over the same period of 2008. China’s year-to-date production was placed at 472.5 million metric tons, up 10.5%, and representing 48% of world steel output so far. Domestic steel production, meanwhile, was figured at 46.6 million tons through October, down 44.7%.

Recent scrap export news has Turkey back in the market, establishing a firmer tone to November ferrous scrap prices along with some positive early expectations for December. Published reports place shredded scrap for export at $290-$295/metric ton up $25-$30, cfr, from a few weeks ago. We’re also hearing of fresh inquires from East Asia, putting that market at $325-$330/metric ton cfr. Morgan Stanley, for one, suggests that as a result of Asian buying, scrap prices, they believe, may bottom out in December or January. More than few are saying that’ll be December at the latest.

London’s GFMS Metals seems to agree, citing a pick up broker business, improving export prices, and steel mill utilization rates that are marginally higher. Also, they say, mills will want to secure material to last over the winter. Goldman Sachs is also figuring that by end-December, ferrous scrap prices could rebound to pre-November levels, especially so if the export market remains active.

Along with a bottoming out of scrap prices in the next month or so, Morgan Stanley is also looking for hot-rolled sheet in coil to start the year at $510/net ton, trending above $560/ton by the spring. Supporting their forecast is domestic production discipline, low imports and low inventories. A quick look at finished steel prices this week has most independent sources showing a range of $490-$519/net ton, f.o.b.

Returning to Turkey, here’s a closer look at what they’ve bought from the U.S. so far. Last year Turkey imported 4,251,005 metric tons of ferrous scrap, by far the largest customer. This year’s year-to-date total is 2.618 million metric tons, 20% lower than comparable ‘08 figures. China now ranks as the largest buyer.

Moving on…the latest data on service center inventories and shipments for October was something less than bullish, but not altogether bearish (a modest negative?) Metals Service Center Institute data reported higher inventories for all steel products compared with September (+2.3%) along with higher shipments (also +2.3%.) At current shipping rates, this represents a 2.3 months supply, unchanged. For carbon steel products, inventories rose 2.6% and average daily shipments fell 2.0%. Flat-rolled products make up the bulk of the carbon steel figures with inventories up 9.1% compared with September. Average daily shipments of flat-rolled fell 0.5%.

In Nonferrous, we’ve routinely reported on the year-to-date price progress of key nonferrous metals (pretty impressive, to say the least) but it’s also instructive to note that while prices have climbed, so have inventories. To some this is a bit counter intuitive while others have taken a more pragmatic view given the relative visible holdings on the LME in relation to overall global consumption. Their focus is more on the level of new production matched against real demand and whether the global market will record an overall annual surplus or deficit.

LME copper stocks are now at their highest level since April, LME zinc stocks are at 4-year highs, tin stocks at 6-year highs, and nickel and aluminum stocks are at or near record highs.

As for what the global supply/demand balances may look like this year, we turn to the World Bureau of Metals Statistics and the International Lead Zinc Study Group for their latest.

Per WBMS: Aluminum at 1,416,000 metric tons surplus January-September, up 45% from one year earlier; Copper at 59,000 metric tons deficit January-September vs. a 27,000 metric-ton surplus one year earlier;  Nickel at 21,000 metric tons deficit January-September; Tin at 15,200 metric tons surplus January-September. Per ILZSG: Lead at 62,000 metric tons surplus January-September and Zinc at 341,000 metric tons surplus January-September.