This is part two of a two part series. Part One examined the hypothesis: Are Industrial Metals Really on the Rise? Part Two reviews the specific metals markets and draws conclusions.
Let’s look at some of the key metals markets in turn to assess this new rise in world industrial activity. Last Friday, Stuart posted a piece on the aluminum market. Essentially we conclude as follows:
- Real production is up for aluminum semis, though that may be temporary
- Prices for ingot have increased but that may be a completely separate issue ” it could be speculative possibly but physical metal is tighter in the US particularly due to scrap shortages and much of the metal on exchanges is tied to long term storage contracts
- Imports are up in the US suggesting demand is picking up or at least re-stocking by distributors may be up
- Mill conversion premiums are not up – ingot to plate or ingot to extrusions -this suggests mill capacity is still below optimum and mills need the orders
So we could be seeing a primary metal increase due to a temporary tightness of the physical ingot market and an increase in semis demand combined. But how long it will last and what happens after that has left us with some open questions.
Now let’s examine some of the other metals markets. Two producers, Outokumpu (stainless steel) and Allegheny Technologies (stainless and exotic alloys) both posted losses (not surprising) but their comments and analyst comments about their earnings announcements are worthy of discussion. First Outokumpu, although inventories seem to have been run down, it will not allow an increase in volumes as end demand remains weak, according to Evli analyst Mika Karppinen. Demand for these types of stainless steel products comes from the kitchenware industries to machinery to aircraft, all of which remain in recession. Allegheny Technologies echoed similar sentiment, “Demand for our titanium alloys and our nickel-based alloys from the aerospace market was at significantly lower levels as the supply chain adjusted to aircraft production schedule push-outs and reduced demand from the ‘aero-engine’ aftermarket,” CEO L. Patrick Hassey said. In addition, according to steel and mining analyst Charles Bradford, few metals companies were reporting any signs of recovery.
Steel billet prices fell on the LME, despite steel price increases by many of the US mills. The question becomes this ” will demand justify higher steel price levels or is this just a temporary pop in prices as mills know some consumers need to restock? With major steel markets still very much flat to down (e.g. automotive, construction) and steel centers only carefully re-stocking, it’s hard to see price increases sticking. Moreover, new capacity has come on-stream and that will put pressure on prices for the second half of the year.
Rounding out the base metals now, as we reported earlier this month, nickel remains in oversupply and as we just covered in stainless, demand remains flat. Zinc may be undervalued, but according to another recent post, copper is likely at it’s ceiling. That leaves tin and lead. On tin, we have gone on record as stating that prices will remain flat to lower through 2010 though longer term, supply issues could cause price increases beyond 2010. As for lead, demand may slightly increase but only with rising automotive production. Q3 will be telling for demand particularly from the automotive industry. Q4 tends to be quieter. Lead may remain in surplus this year and next, putting a brake on prices. And like tin, lead could increase once demand really increases.
Finally, some comments about China. As we reported last week, we see some potential big problems with China’s demand due to China’s lending boom. According to that post, since December 2008, China’s banks have made loans of over RMB 6 trillion but the author [ed note: of a recent book] believes much of it has been used to fuel speculation rather than investment. As a result, commodity prices have surged and the Chinese economy has suffered. In the author’s words, The damage is already significant. If lending doesn’t cool, this force would transfer Chinese income to foreigners and trigger stagflation for a long time to come. We have long argued that much of the buying in China came as a result of re-stocking, government stockpiling or short-term stimulus dollars creating incentives to buy big-ticket items such as automobiles. Whether or not China can sustain real long-term growth will depend upon its ability to fuel domestic demand. We think the jury is still out on that question.
On the basis of demand alone, industrial metals will move higher [eventually] but we don’t see that before at least the middle of 2010 if not later. If the market continues to increase, you can be sure it’s due to ETF’s, speculators and commodity traders because the underlying fundamentals aren’t telling us its so.