May/June 1997
By Robert J. Garino
Robert J. Garino is director of commodities for ISRI.
The final numbers are in on the health of the U.S. economy in 1996, and the results indicate it was another growth year, one that outperformed the expectations of many, especially in the metals industries.
Looking at the numbers, U.S. production of goods and services as measured by the gross domestic product (GDP) grew 3.4 percent last year. This was considerably better than the 2-percent rate recorded in 1995, which was the lowest growth since the recession year of 1991 in which the U.S. economy contracted 1 percent.
Part of 1996’s strong showing can be attributed to the impressive numbers racked up by the all-important automotive and housing sectors. The Big Three automakers, for instance, raked in $12.9 billion, surpassing their 1995 earnings of $12.2 billion and falling just short of their all-time record revenue of $13.9 billion in 1994. The housing market also rebounded last year, completing an estimated 1.47 million units, or approximately 8.8 percent more than 1995. Even more impressive, new home sales rose 13.3 percent compared with 1995.
As further indications of the economy’s strength, unemployment and inflation remained low, though the latter—as measured by both the producer price index and the consumer price index—increased compared with 1995, with the two indexes rising at compounded annual rates of 2.8 and 3.3 percent, respectively.
Nevertheless, the relatively low inflation pressure partly explains why precious metals such as gold remained stuck in a narrow trading range last year. Investors turned away from using precious metals as an inflation hedge and instead looked to equities as investment opportunities. Gold, which approached $400 per troy ounce in January 1996, was closer to $370 a troy ounce as the year ended. In contrast, the Standard & Poor’s 500 stock index increased 23 percent in 1996.
International trade, meanwhile, wasn’t a bright spot for the U.S. economy in 1996, as the trade deficit in goods rose for the second year in a row. As the dollar strengthened last year and business activity slowed in Europe and most of Asia, overseas demand for scrap metals, paper, and plastics weakened appreciably.
The Year According to Recyclers
What did these economic and market fundamentals mean for scrap processors, consumers, and brokers last year? “Frankly, it was a struggle,” laments one Texas processor. “It started out fairly strong, but, by the second half, it got ugly in a hurry.” A nonferrous recycler puts it this way: “What we made in the first half, we gave back in the second half.” Still others will remember 1996 as a year of significant consolidation in the industry, with many high-profile mergers and acquisitions.
Despite some complaints, most ferrous scrap market participants can look back on 1996 as generally positive. Falling iron and steel scrap prices in the final quarter, however, created fresh anxiety and prompted recyclers to wonder if a negative trend was being established and what the price decline portended for 1997. Few, however, felt that a major economic downturn was in the offing—hence the fairly optimistic views for this year in general, and the steel industry in particular.
For nonferrous executives, the Sumitomo copper scandal and the omnipresent influence of speculative and investment funds kept market forecasters at their respective drawing boards for most of the year. This year, positive domestic demand expectations and relatively healthy world fundamentals will likely limit the downside for most base metals. Even so, many believe 1997 will continue to present an uncertain business climate, with price volatility remaining a constant companion of buyers and sellers.
In the nonmetallic recycling sector—principally paper and the commodity grades of scrap plastics—1996 was a year in which prices and consumption suffered. It was, in short, a year to forget. For paper and plastic processors, 1997 is a hoped-for year of recovery.
A Big Picture View of 1997
Virtually all government and private economists indicate that the U.S. economy is far from slowing down. President Clinton’s annual “Economic Report of the President” argued that the economy exhibits none of the classic signs that would indicate an economic downturn is around the corner. The report, issued in February, offered a conservative GDP growth rate of 2 percent for fiscal 1998, rising to 2.3 percent for the following five years.
If anything, the Federal Reserve was concerned that the economy was growing too fast in early 1997—hence its decision in late March to raise short-term interest rates 1/4 point to 5.5 percent.
While some believe that the Fed’s move was a preemptive strike against inflation, others view the move as a way of bringing short-term interest rates more in line with gradually rising longer-term interest rates. In any case, the stock market responded with a wave of heavy selling at the start of the second quarter of 1997.
Most global economic forecasts are generally encouraging and many were being revised upward in light of positive first quarter 1997 data. According to Tokyo-Mitsubishi International (London), global economic growth this year will likely outpace the International Monetary Fund’s projected 3.7-percent GDP rate.
If these forecasts are correct, or even close, metallic and nonmetallic scrap commodities should be able to look ahead to 1997 with renewed vigor and confidence. This review looks at how the major commodities fared in 1996 and where they seem to heading thus far this year.
Aluminum
The domestic aluminum market recorded significant pluses and minuses last year. Primary aluminum production totaled 3.58 million mt, or 6 percent greater than in 1996, according to preliminary ReMA estimates based on data from the U.S. Geological Survey (Reston, Va.). Aluminum imports and exports of semis and ingot fell 6 and 7 percent, respectively, last year compared with the previous year. Similarly, exports of aluminum scrap fell significantly, as did LME prices throughout 1996, with the year-end LME cash aluminum average settling at 68.2 cents a pound vs. 81.9 cents in 1995.
Domestic shipments in 1996 totaled an estimated 8.97 million tons, or 1.4 percent less than in 1995, reports the Aluminum Association (Washington, D.C.). Apparent consumption, meanwhile, was essentially unchanged at 6.3 million mt, the U.S. Geological Survey says, though ReMA statistics indicate a 1.2 percent increase compared with 1995. Overall scrap consumption also increased, despite a decrease in the quantity of UBCs collected, according to ReMA data. Nevertheless, lighter cans and lower can shipments resulted in an overall increase in the 1996 UBC recycling rate to 63.5 percent compared with 62.2 percent in 1995.
Midyear Outlook. Several world aluminum forecasts paint an extremely positive picture for 1997 and beyond. Alumax Inc. (Norcross, Ga.), for instance, sees Western World primary consumption increasing more than 5 percent this year, or roughly three times the annual growth rate over the past 10 years. Others also expect significant restocking to occur this year, which would lift average aluminum prices.
Macquarie Equities Ltd. (London), for one, ventures that average aluminum prices could increase 10 percent compared with 1996. And in March, Prudential Securities (New York City) forecast a 1997 LME average of 74-to-77 cents a pound, rising to 83 cents in 1998.
Copper
Price volatility notwithstanding, the copper market proved far more resilient than many expected following last summer’s price crash caused by the Sumitomo trading scandal. After experiencing a near free-fall last June, LME cash copper prices recovered, averaging $1.04 cents a pound for the year compared with $1.33 in 1995. World copper prices were said to be underpinned by so-called speculative hedge funds and uncertain Chinese buying that, some contended, clouded the supply-
demand fundamentals.
As the year unfolded, it became apparent that relatively low world copper inventories, coupled with surprisingly strong consumption—especially in North America—would characterize 1996 as much as the Sumitomo debacle. In the United States, domestic rod shipments rose 11 percent to 2.15 million tons, while brass mill deliveries rose more than 5 percent to 1.25 million tons. Apparent copper consumption, as reported by ISRI, rose 2.5 percent last year, though domestic scrap usage remained essentially unchanged.
Midyear Outlook. Virtually all published studies and near-term price forecasts suggest that world copper supplies will overtake demand in the second half of 1997 and that lower average copper prices are in the offing, with some copper bears predicting LME and Comex prices trading below $1 a pound by year’s end.
Arguing against this generalization, however, is the fact that world consumption numbers have tended to be consistently underestimated, while the timetables for new supplies are consistently overestimated.
A key wild card in the scenario, of course, is East-West trade in refined copper and its effect on the world supply-demand balance. Chinese imports, in particular, remain a mystery, along with the expected 1997 exports from the Commonwealth of Independent States and Poland.
Iron & Steel
Paced by solid demand for steel-containing products, U.S. steel mill shipments topped the 100-million-ton mark—totaling 100.5 million tons—for the first time since 1979. In addition, the United States imported 29.2 million tons of steel mill products, the second-highest import tonnage ever. Compared with 1995, total domestic steel consumption rose 2.8 percent in 1996, while domestic scrap consumption rose at a 3.3-percent clip.
Although steel volumes were impressive, spot prices for finished products such as hot- and cold-rolled sheet were, on average, lower compared with 1995, and ferrous scrap prices—as reflected in the No.1 HMS composite—fell some 4 percent. Far from being limited to the domestic market, price weakness was an international theme throughout most of 1996, with both Western Europe and Japan citing difficulties in their respective markets.
Midyear Outlook. Increased imports of steel last year, plus increased domestic competition and uncertain markets this year, haven’t diminished the industry’s optimism for shipping 100 million tons again this year. A forecast from the Organization for Economic Cooperation and Development, however, maintains that U.S. demand will decline around 2.8 percent this year, though most of this decline will reportedly lie in lower imports.
Announcements by the Big Three automakers suggest little change in production targets for the first half of 1997 compared with comparable 1996 figures, though sales forecasts for light vehicles are pointing to 14.9 million units this year compared with 15.1 million in 1996. Still, first quarter sales figures were up 2 percent to 3.6 million units over year-earlier numbers. Housing starts, too, are expected to be lower this year, falling to lows seen in 1995, according to the National Association of Home Builders (Washington, D.C.). Another critical factor is the amount of new scrap-fed minimill capacity expected to come on-line in the second half of the year. These combined factors could, some believe, result in intense competition among steelmakers and processors, thus keeping a tight lid on finished steel prices and scrap margins.
Lead
Lead usage revealed surprising strength in 1996. World consumption rose 2.3 percent compared with 1995 to a record 5.7 million mt, while refined production fell 1.4 percent to 5.53 million mt, according to the International Lead and Zinc Study Group (ILZSG) (London).
Western World numbers mirrored the total world numbers, with the shortfall between production and consumption met by hefty East European exports and existing inventories, says ILZSG. Other analysts note, however, that Western World consumption rates fell behind overall metal availability, which helps explain the LME price weakness that became apparent as the year wound down. For the full year, however, the LME cash average for lead was 35.1 cents a pound—its second-highest annual average in a decade.
Domestic lead consumption, meanwhile, rose approximately 4 percent in 1996 compared with 1995, driven by positive lead-acid battery production. While last year’s shipments of 77.2 million replacement batteries showed little change from the 77.1 million units shipped in 1995, original equipment shipments were far stronger, increasing 3.7 percent to 16.2 million units compared with 1995’s 15.6 million, reports Battery Council International (Chicago). To meet this demand, secondary lead producers stepped up production to compensate for lower domestic primary lead production. Scrap consumption rose 6.4 percent in response.
Midyear Outlook. Western World refined lead consumption in 1997 is expected to remain positive, and analysts predict the market will once again see a statistical deficit, albeit lower than in 1995 or 1996.
Nova Pb Inc. (Ville Ste-Catherine, Quebec) forecasts 1.6-percent consumption growth, while Western World production, plus East European exports and U.S. government lead sales, will boost supply 2.3 percent. Lead supplies will still lag consumption, however, and above-ground stocks will again be called on to fill the gap.
Recent price forecasts for 1997 have tended to be more conservative than those offered late last year. While most are content to believe that the battery sector will provide positive lead consumption and that the stock-to-consumption ratio will remain low, few see LME averages above the lofty 1996 level. Analysts and some consumers are expecting an annual average this year more in the low-30-cent-a-pound range.
Nickel & Stainless
Both nickel and its principal end-use consuming industry—stainless steel—took what some termed a breather in 1996. By several accounts, Western World primary nickel consumption fell 4 to 5 percent to around 860,000 mt. Though the U.S. market fared better, it too experienced an overall downturn in primary nickel usage compared with 1995. By the end of 1996, a bearish wave gripped the nickel market in the United States and Europe as LME metal traded below $3 a pound, with the cash LME average ending the year at $3.40.
The decline in nickel consumption was traced to lower nickel-containing stainless steel output and higher scrap utilization rates. Fresh demand, meanwhile, was met by an apparent large overhang of finished stainless steel products, which helps explain why the term destocking was often used to describe the state of stainless in 1996. At the same time, the relative strength of the U.S. marketplace attracted record imports—553,221 tons, or 10 percent more than in 1995—which depressed domestic flat-rolled stainless prices.
Midyear Outlook. A fair amount of optimism is being expressed for both the nickel and stainless steel industries in 1997. Falconbridge Ltd. (Toronto) sees Western World nickel demand increasing 5.7 percent to 925,000 mt, while nickel supply, at 915,000 mt, would leave the market 10,000 mt short. Other analysts see supply deficits this year and next.
What does this mean for prices? Rudolf Wolff & Co. Ltd. (London) predicts a 1997 LME average of $3.76 a pound, with spikes above $4 likely. Such higher price forecasts hinge on the belief that the well-documented overhang of stainless steel products has been cleared out and that positive economic growth will translate into fresh stainless demand. East-West trade uncertainties are also a factor in this upbeat scenario. If these assumptions prove correct, domestic prospects for nickel and scrap look equally bright.
Interestingly, stainless mills have less optimistic expectations for higher transacted prices this year owing to a perceived imbalance of world mill production vs. actual consumption.
Paper & Paperboard
Following their record sales performance in 1995, North American paper and paperboard producers encountered an extremely difficult 1996, as prices for linerboard to Northern bleached softwood Kraft dropped sharply in response to soft U.S. and European demand, as well as inventory drawdowns. Paper and paperboard production increased less than 1 percent above 1995 levels, while total shipments of paper and allied products reportedly fell 2.2 percent last year. This drop is particularly notable given the paper industry’s traditional habit of mirroring overall GDP growth rates.
Paper recyclers weren’t immune to the industry downturn. Scrap paper prices slid lower throughout the first half of last year before leveling off last fall. Diminished mill demand, increased local collections, and significantly lower exports—a 31-percent year-on-year decline—took their collective toll. Despite all of this, however, mill consumption of scrap paper increased 9 percent over 1995, with OCC leading the way, and the domestic paper recovery rate increased to 44.8 percent compared with 44.3 percent in 1995, according to the American Forest & Paper Association (Washington, D.C.).
Midyear Outlook. While analysts expect the paper industries to begin to recover in 1997, they note that the anticipated uptick will probably be shallow and broad-based. The industry, many believe, will have to contend with uneven demand, well-stocked mills, and extended mill downtimes.
Nevertheless, industry experts expect higher prices in 1997, as well as increases in recovered paper consumption and exports. Total U.S. recovery could reach 44.5 million tons, or 6.2 percent greater than last year, some estimates indicate. In addition, the Department of Commerce sees product shipments increasing about 2 percent this year based on expanded sales opportunities in the domestic market and improved access to foreign markets.
Plastics
In terms of gross sales and demand, the plastic industry posted respectable gains in 1996. Virgin resin sales increased 10 percent to 76.1 billion pounds, while total domestic production totaled 73.6 billion pounds, or 7.7 percent greater than 1995. Commodity-grade resins such as PET and HDPE, in particular, saw higher consumption, with bottle-grade usage of each increasing 11.4 and 10.4 percent, respectively. Virtually all resins for the domestic packaging sector, in fact, registered year-on-year increases. PVC bottles were the exception, with consumption and sales decreasing 2.3 and 8 percent, respectively.
Though volumes were higher, many resin prices suffered, with declines reported around the globe last year. Domestic PET tags, for example, were literally halved as feedstock prices fell sharply. This, coupled with huge resin overcapacity and lower offshore demand, overwhelmed the domestic market.
Scrap plastics were harder hit last year, with recycled PET values hitting historic lows. The poor market conditions forced numerous plastic scrap processors out of business last year. About the only encouraging note was recyled HDPE, which held relatively stable.
Midyear Outlook. A positive economic outlook for 1997 should also translate into another positive year for virgin resin producers, with industry analysts projecting about 4-percent growth for the year. Packaging producers are less optimistic, however, citing depressed PET prices and modest volume growth potential.
Similarly, the recycled PET and polystyrene markets don’t anticipate a turnaround in fresh demand—or higher prices—anytime soon. As with last year, HDPE prospects appear brighter in comparison owing to tighter ethylene supplies expected through the first three quarters of this year.
Zinc
By most measures, the domestic zinc industry recorded solid gains in 1996, according to preliminary ReMA data. Principal consuming industries such as galvanizers, zinc-based alloyers, and brass mills posted positive demand and shipment numbers last year, helping boost apparent consumption 4.6 percent.
Domestic scrap consumption, led by increased recovery of galvanizers’ dross and zinc-containing flue dust, is estimated to have increased 16 percent compared with 1995, giving scrap a 17-percent share of the market. Exports of zinc scrap, meanwhile, ended the year 17 percent lower than 1995’s total.
Though world zinc consumption cooled slightly last year, overall zinc usage has increased more than 10 percent in the past several years while new production has held essentially steady since 1993. According to ILZSG, world demand outpaced production by 218,000 mt last year, with the shortfall in the west made up by Chinese exports and stock withdrawals.
As for prices, LME cash zinc tags showed little movement last year, averaging 46.5 cents compared with 46.7 cents in 1995.
Midyear Outlook. Often described as the “quiet” or “forgotten” metal, zinc has extremely bright price prospects this year thanks to promising fundamentals. Analysts look for continued growth around the globe, predicting 2.3 to 2.5 percent annually for the next several years, with the strongest rates expected in the rapidly developing nations.
New production will continue to lag consumption, thereby assuring deficits this year and next, with Metal Bulletin Research (London) estimating this year’s Western World shortfall to be 200,000 mt.
Given this bullish sentiment, LME zinc prices—and domestic premiums—are expected to move well ahead of last year’s averages. HSBC James Capel (New York City), for one, ventures that zinc prices will average 55 cents a pound this year and 60 cents in 1998. •
The final numbers are in on the health of the U.S. economy in 1996, and the results indicate it was another growth year, one that outperformed the expectations of many, especially in the metals industries.