Strong Manufacturing Numbers Support Copper, Other Base Metals But Will It Last?

As many of our readers surely have read about lately, US manufacturing numbers for February were reported by the Institute for Supply Management (ISM) to be the strongest in seven years. The ISM’s purchasing managers index (PMI), a primary metric for measuring manufacturing growth, was up to 61.4, from 60.8 in January; that’s a 0.6 percent increase. The PMI numbers show that US manufacturing activity, according to the ISM’s Web site, has expanded for the 19th straight month, and the overall economy grew for the 21st consecutive month. On the face of it, this appears to indicate good news for the metals sector.

However, although the overall numbers look appealing, some sub-findings told a different story. The ISM reported that out of 18 manufacturing industries, 14 of them reported growth in February, and they listed them in order. (Fabricated metal products placed ninth out of 14. One respondent from the fabricated metals industry said, “Our plants are working 24/7 to meet production demands.”) But, primary metals represents one of the four industries that contracted in February.

Despite reports of contracting activity in the primary metals sector, the one thing that is not going down anytime soon is prices. Commodity prices rose across the board, and no commodities at all reported price drops in February. For example, aluminum has been rising for six straight months, steel for six straight months as well, and copper for seven straight months.

Indeed, things are looking good for copper. Although Middle East worries are affecting short-term swings, the fundamentals for copper appear a bit better. Emerging markets, not to mention China whose economy, definitions aside, has already heartily “emerged in my book will continue to keep copper afloat. And the auto sector’s positive recent performance and upbeat outlook for 2011 certainly does its part as well.

According to a Dow Jones article, the big three Detroit automakers, Chrysler, General Motors and Ford reported double-digit growth in February car sales. Tatyana Shumsky reports that GM experienced a 46 percent jump in sales, to 207,028 vehicles from 141,951 a year earlier. Ford came next with a 14 percent increase to 156,626 units, up from 137,664 in January. Chrysler came last, as usual my words, not Shumsky’s reporting a 13 percent increase to 95,102 units, from 84,449 units February last year.

“This is the slowest season for car sales. It gives us optimism that going into spring and summer, sales will increase even more,” said Larry Young, president of Covenant Trading LLC, in the article. “There’s a lot of pent-up demand because people have been holding onto cars longer through the recession,” Young said.

For March and beyond, we should not only keep an eye on the auto sector, but also keep close tabs on domestic construction as well. (Housing starts are still limping along.) Perhaps most importantly in the next few months ahead, transport costs, domestically and intercontinentally, may be the largest factor for metals producers and suppliers as of this writing, crude oil is trading at $105.31 a barrel.

–Taras Berezowsky

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