Metals demand to increase in near term

Copper, often viewed as a barometer of global economies because of its wide use in construction and infrastructure, has a short-term outlook showing a shortage.

The economic outlook for U.S. manufacturing in the first quarter is strong, and MetalPrices.com foresees global demand improving as well.

The latest report from the Institute for Supply Management said its Purchasing Managers Index (PMI™)was at 57 percent in December, the second-highest reading for the year and only 0.3 percentage point below November's reading. Also, its New Orders Index increased in December by 0.6 percentage point to 64.2 percent, its highest reading since April 2010 when it registered 65.1 percent. Of the 18 manufacturing industries, 13 reported growth in December.

For steel, automotive demand is in the driver’s seat and has been for much of the past year. In early January the domestic mills were reporting that order lead-times were still at four weeks for hot-rolled coils and five to six weeks for cold-rolled and galvanized. But steel users can expect to dig deeper into their pockets this quarter to pay for steel products. Nucor, Arcelor-Mittal, and NLMK delivered an early Christmas “present,” raising hot-rolled coil prices to $35/cwt ($700 per net ton), while the tags on cold-rolled and galvanized climbed to $40.50 ($810 per ton).

The mills blamed higher raw materials costs—ferrous scrap prices, in other words—for the price hikes. Scrap prices rose by as much as $60 per gross ton in the fourth quarter and were up by between $10 and $20 per gross ton in January. Key obsolete grades like shredded scrap and No. 1 heavy melt are in tight supply, and as a result, those grades posted the highest gains during this season’s early harsh winter weather.

Whether the higher sheet prices will hold was still in doubt at the start of January. Some domestic steel mills had yet to get onboard with the new prices. Steelmakers may believe the higher prices will prevail, but a few industry analysts argue that the absence of index-based steel contracts will create uncertainty and may contribute volatility in the steel market this quarter.

Some also wonder whether the sheet steel boom may run out of gas this quarter, at least for the domestic mills. They point to several reasons for this:

1. The latest round of steel price hikes could draw more imported steel, which in many offshore markets is selling for at least $100 per ton below the U.S. market prices. Chinese exports of cold-rolled into the U.S. were on the rise in December and could continue to climb in the first quarter because of higher domestic mill prices. Also, with order lead-times still out to a month or longer, that may provide steel service centers and distributors with enough time to shop overseas.
2. Barring some catastrophic breakdown, all of the lengthy maintenance and new equipment outages at domestic flat-rolled mills are finished. Thus, steel supply will not be as constrained as it was during the second half of last year.
3. Will the automakers soon begin to tap the brakes on their output? December saw a modest decline in the sales, but it’s difficult to say whether that marks the start of a slowdown in auto production.
4. The weakness of overseas demand for ferrous scrap and the start-up of Nucor’s new direct reduced iron plant in Louisiana could ease the pressure on scrap supplies and limit price increases. Also, without much demand from Turkey, U.S. East and Gulf Coast scrap exporters are likely to do an about-face and sell their shredded scrap output into the domestic market.

Although the steel side of the metals business is reporting stronger manufacturing and forecasting increased global demand mainly due to the automotive sector, other manufacturing largely affecting base metals does not appear to be as strong. Supply of nonferrous metals remains flat to down, causing premiums to increase while demand is expected to show improvement. This seems to be uniform throughout all base metals. Trading values will be effected by the strengthening of the dollar, political headwinds, and demand from China.

Reported aluminum exchange inventories are critically high, and antiquated rules pertaining to daily shipments continue to create a shortage of available metal. Despite the recent amendments to London Metal Exchange rules, MetalPrices.com does not believe bottlenecks will be alleviated until later in the year. Short term, current premiums should continue to hold. Premiums in Japan for the first quarter reflect a significant increase over the fourth quarter’s premium as Asia anticipates their economies will expand in 2014. The GCC (Cooperation Council for the Arab States of the Gulf) continues to grow in its primary production capabilities and is increasing its role in the supply picture.

Copper, often viewed as a barometer of global economies because of its wide use in construction and infrastructure, has a short-term outlook showing a shortage caused by strikes in Chile, smelter problems, and scrap being in very short supply worldwide. In addition to exchange-listed stocks of copper having decreased to record low levels, the stocks held in Chinese-listed warehouses are tied up in financing deals, further limiting availability to the physical community. In the longer term, however, concentrate production is expected to increase and may create a surplus of copper, again depending on the Chinese. Global supply constraints may cause prices and premiums to increase even though most consumers are anticipating business to be flat going into the new year.

In other base metals, zinc, tied to the automotive sector, has had increased premiums in the fourth quarter, which is a sign of steady to increasing demand.

Predictions for nickel, which is primarily used in making stainless steel, indicate a surplus throughout 2015. There has been very little activity within the stainless steel sector in the last few years, resulting in limited scrap, which may ultimately drive prices upward. Furthermore, some believe that if demand for stainless increases and nickel prices continue to show strength, scrap prices could reach the mid $0.70s. Nickel premiums are currently stagnant because of oversupply.

Finally, most of the lead demand is influenced by the automotive industry and battery production. Prices have remained steady and are expected to remain flat in the first quarter.

Although there is a general consensus across Europe and the U.S. indicating improved demand, including recent reports of higher manufacturing activity and better employment figures, our sources in Europe and Asia complain that business is slow and anticipate sideway conditions with little improvement for the first quarter. In the U.S., traders are also expressing little enthusiasm.

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