As a lagging economic indicator, the ISM’s latest manufacturing news leaves a lot to be desired. From our vantage point, the importance of the ISM numbers is to better understand how they relate to supply and demand, a key driver of commodity prices. It will come as a shock to no one that the US Manufacturing economy is contracting. According to this key measure of the ISM analysis, the PMI (Purchasing Manager’s Index) dropped from 49.9 percent to 43.5 percent. Any number under 50 indicates economic contraction. New orders also came down from 48.3 percent in August to 38.8 percent in September. Production declined by 11.3 percent to 40.8. Employment dropped 7.9 percent to 41.8 which indicates a decline in the number of people employed. And nearly all the remaining indexes were also down…supplier deliveries slowed, inventories decreased, customer inventories decreased (indicating that customer inventories are too high now). The only not so bad news relates to new export numbers where the index came in at 52 (still indicating growth) though slowing growth as August’s index was at 57 percent. Imports continued to decline as did the number of backlog orders. The ISM report is published monthly.
What does this all mean for metals buyers?
Some key metals commodities have come down in price, providing some margin relief to companies purchasing aluminum products, copper, copper products, stainless steel products, steel and some steel products. Only four industries reported growth in the number of new orders including: paper products, petroleum and coal products, misc. manufacturing and food, beverage and tobacco products. Falling demand will undoubtedly continue to put pressure on metals producers of all types.
Not that any of these numbers are any surprise to MetalMiner readers. But they do tell us something about the state of domestic demand across industries. As companies finalize their strategic planning processes and forecasts for 2009, as a lagging indicator we have at least 6 months of market softness which may continue to erode metals prices.