January/February 2013
The past year brought its share of economic storm clouds, but current indicators hint at sunnier prospects in 2013.
By Joe Pickard
Given the lackluster global economic performance in 2012 and the long list of risk factors remaining at the start of 2013, it’s no surprise that major international and financial organizations have downgraded their forecasts for this year. With economic uncertainty weighing on the expectations of consumers, business leaders, investors, and forecasters alike, the consensus outlook has more than its share of worrisome clouds.
To be sure, 2012 was less rosy than many had expected, and there are plenty of reasons for concern going forward. Though political leaders in Washington managed—barely—to prevent the United States from going over the fiscal cliff, significant risks remain. The country still faces long-term fiscal imbalances, persistently high unemployment, wavering consumer and business confidence, and political gridlock that will affect upcoming action needed on the federal budget and the nation’s debt ceiling.
As a result, the latest projections from the Federal Reserve Board (Washington, D.C.) expect modest 2.3 percent to 3 percent growth in real U.S. gross domestic product this year, down from the 2.8-percent to 3.2-percent growth forecast for 2013 it offered in January 2012. The International Monetary Fund (Washington, D.C.) forecasts even more sluggish U.S. GDP growth of 2.1 percent, with eurozone GDP inching up just 0.2 percent this year. For advanced economies worldwide, the IMF expects 1.5-percent GDP growth this year compared with the 5.6-percent growth it expects in emerging markets and developing economies.
Why are advanced economies having such a difficult time escaping the so-called Great Recession? As Fed Chairman Ben Bernanke explained in a series of speeches in 2012, economic recoveries after severe financial crises—especially those associated with a housing bust—tend to take longer and frequently have many years of weak performance. Rising unemployment and falling housing prices typically drag on for five and six years, respectively, following severe financial crises and “almost invariably” go hand in hand with soaring government debt levels, Harvard University economists Carmen Reinhart and Kenneth Rogoff state in a recent study. Yet even severe downturns eventually come to an end, and signs that long-dormant sectors of the U.S. economy are reviving point to possibly brighter skies ahead.
To date, the U.S. economic recovery has lacked a sustained revival in the housing market. Though a housing-sector boom was a catalyst for growth in previous recoveries, that was less likely this time around due to the depth of the crisis. Instead, the depressed housing and labor markets have served as twin drags on the recovery, though both markets are showing significant signs of improvement. Building permits for private homes were 27 percent higher, year on year, as of November 2012, reaching a seasonally adjusted annual rate of 899,000—the highest level since July 2008, the U.S. Department of Commerce (Washington, D.C.) reported in December. Existing home sales are rising as well. Data from the National Association of Realtors (Chicago) show that U.S. sales of existing homes increased 6 percent from October to November, to a seasonally adjusted annual rate of more than 5 million units, and the median existing home price advanced 10 percent, year on year, through November, to $180,600. At the same time, the U.S. housing inventory at the end of November declined 3.8 percent, to 2.03 million homes available for sale—the lowest inventory level since September 2005, NAR says.
The housing market still has a long way to go to reach prerecession levels, but the recent market stabilization coincides with historically low interest rates, an increasingly competitive U.S. manufacturing sector, and continued improvement in the domestic labor market. After bottoming out at 15.4 million persons unemployed and a 10-percent unemployment rate in October 2009, the most recent report from the U.S. Department of Labor (Washington, D.C.) shows the number of unemployed persons dropped to 12 million in November while the unemployment rate improved to 7.8 percent. Though some of the decrease in the unemployment rate is due to a decline in labor force participation rates, and though the number of unemployed persons remains stubbornly high, the government figures confirm a steady improvement in employment among prime-age workers, those ages 25 to 54.
U.S. labor productivity also is improving. Figures from the U.S. Bureau of Labor Statistics (Washington, D.C.) show that nonfarm business-sector labor productivity in the third quarter of 2012 increased 2.9 percent from the previous quarter. Improving U.S. labor productivity, relatively attractive domestic energy costs, rising wages in China, and expensive ocean cargo-ship fuel have made the U.S. manufacturing sector more competitive, allowing more “insourcing” of production, the Atlantic states in a December 2012 article.
Though regional and national manufacturing were volatile in the second half of 2012, manufacturing output was up 2.7 percent through November compared with that period in 2011, Fed figures show. Of the key manufacturing sectors, the automotive industry was among the strongest performers last year, with output of motor vehicles and parts up 16.5 percent through November and light-vehicle sales that month reaching the highest level since December 2007, according to Fed data.
Given the improvements in U.S. housing, unemployment, productivity, and manufacturing, why aren’t economic conditions brighter? Part of the answer lies in the depth of the recession, which at its worst—in the fourth quarter of 2008—saw real U.S. GDP contract nearly 9 percent. Another part of the answer lies overseas. The comparatively worse economic conditions in Europe, rising tensions in the Middle East, and slower growth in China and other important developing economies have weighed on world economic growth in general and the increasingly global scrap marketplace in particular.
In 2011, more than 40 percent of U.S. scrap export sales were to China and the European Union, according to data from the U.S. Census Bureau (Suitland, Md.). Slower growth in these key overseas markets has had a pronounced impact on the U.S. scrap industry. To wit, U.S. scrap export sales through October 2012 were down 29 percent, a year-on-year loss of almost $10 billion, according to Census Bureau figures. Here again, however, the skies appear to be clearing, as the eurozone moves toward a closer financial and banking union, dispelling some of the concerns about its commitment to a common market and currency, while China’s new political leaders appear determined to boost output and domestic demand this year. According to HSBC (London), China’s manufacturing activity in December 2012 expanded at the fastest rate in 19 months as its China Manufacturing Purchasing Managers Index rose to 51.5, signaling continued expansion.
Europe isn’t out of the woods yet, and any number of shocks could derail the U.S. economic recovery, but there are grounds for cautious optimism as 2013 begins. U.S. consumers continue to climb out of debt; the Fed is maintaining ultra-low interest rates while expanding its balance sheet; job growth continues at a steady pace; and key markets appear poised to turn the corner. Though scrap market participants might want to keep an umbrella handy for the occasional shower, a growing number of macroeconomic indicators point to sunnier days ahead. Here’s a look at some factors that could affect the major scrap commodities this year.
Aluminum
The light metal had a decidedly mixed performance in 2012, as global economic worries and overcapacity weighed on its prices for much of the year. Though the London Metal Exchange three-month aluminum price at the end of 2012 was up 4 percent compared with year-end 2011, the average daily price for all of 2012 declined 15 percent compared with 2011, to $2,049 a mt, after bottoming out at $1,831 a mt in August. World primary aluminum output continued to rise, and LME aluminum stocks soared to a record of more than 5.2 million mt, but warehouse financing deals reportedly kept prime material availability in check and physical market premiums at historic highs.
The aluminum market also benefited from improving demand in North America, with U.S. and Canadian demand together increasing 5 percent through October 2012, year on year, to 19.22 million pounds, the Aluminum Association (Arlington, Va.) reports. Factors that contributed to rising aluminum prices heading into 2013 included accommodative monetary policy, purchases by China’s State Reserve Bureau, and stabilizing macroeconomic conditions. With interest rates likely to remain extremely low, warehouse financing deals should remain viable for the foreseeable future, CRU Group (London) says. Though most analysts expect the Chinese aluminum market to remain in surplus through this year at least, the World Bank’s Development Prospects Group (Washington, D.C.) expects the average aluminum price to rise to $2,350 a mt in 2013 and $2,500 in 2014.
Copper
Concerns about slowing Chinese demand, deteriorating economic conditions in Europe, and the political stalemate in Washington weighed on prices for a range of commodities in 2012, including copper. Though the red metal posted a 5-percent price gain from year-end 2011 to year-end 2012, the LME average three-month copper price came in well below most forecasts in 2012, at $7,945 a mt, despite extremely accommodative monetary policies, declining LME and Comex copper inventories, and continued refined copper production deficits. According to figures from the International Copper Study Group (Lisbon, Portugal), the global refined copper market had a production deficit of 594,000 mt through September, with demand for all of 2012 likely to exceed supply for the third consecutive year.
This year, however, copper mine output is expected to rise 6.4 percent, outstripping a 1.5-percent increase in copper use and resulting in an anticipated surplus of nearly 460,000 mt, ICSG reports. Among the major copper producers, Freeport-McMoRan Copper & Gold (Phoenix) is projecting consolidated sales from its copper mines to increase approximately 20 percent in 2013, to 4.3 billion pounds, as its Grasberg mine in Indonesia begins to tap higher ore grades in the second half of the year. Goldman Sachs Group (New York) is bullish on copper in 2013, citing broad-based gains in China, an end to destocking, and accelerating Chinese property sales. As of December, the company had a six-month refined copper price target of $9,000 a mt.
Iron and Steel
Ferrous market conditions in 2012 were even more challenging than those in the nonferrous sectors, especially in Europe. In the United States, obsolete ferrous scrap price swings of $30, $40, and $50 a gross ton per month were more often the rule than the exception in the second half of the year. Finished steel prices also saw considerable volatility, despite domestic steel mills’ repeated attempts to stabilize them. According to The Steel Index (London), domestic hot-rolled coil prices ranged from $580 a ton on the low side to a high of $748. U.S. steel mill capacity utilization rates, meanwhile, briefly dipped below 70 percent in the fourth quarter, according to the American Iron and Steel Institute (Washington, D.C.).
Though the U.S. scrap market experienced its share of ups and downs in 2012, domestic consumption of purchased and home ferrous scrap reached 42.5 million mt through September, a 2-percent increase compared with the same period in 2011, according to the U.S. Geological Survey (Reston, Va.). In comparison, export demand for U.S. ferrous scrap (including stainless and alloy scrap) dropped 11 percent by volume through October, to 18.4 million mt, according to Census Bureau data. Notably, China’s purchases of U.S. ferrous scrap plunged 55 percent in the January to October period, to 1.6 million mt, compared with that period in 2011—down more than 2 million mt.
As the world’s largest steel producer, China also figures prominently in the problem of global steel overcapacity. According to the World Steel Association (Brussels), China produced more than 660 million mt of steel in the first 11 months of 2012, up nearly 3 percent year on year. Though China’s massive output has put pressure on global steel prices, the Chinese government reportedly plans to encourage domestic mills to raise the share of scrap they use in their melts. For 2013, Goldman Sachs sees Chinese steel demand increasing 5.3 percent and its steel production expanding to 745 million mt, worsening the overcapacity in the Chinese construction steel sector in particular.
Lead and Zinc
As they were with most other base metals, LME average three-month prices for lead and zinc were down in 2012 compared with 2011, though the year-end 2012 prices for both metals were higher than their year-end 2011 tags. Lead’s final price in 2012, for instance, was $2,342 a mt, up 17 percent, while zinc ended last year at $2,064, for a year-end gain of 12 percent. For 2012 overall, however,the LME average three-month lead price fell to $2,073 a mt, and the equivalent LME price for zinc dropped to $1,963, from $2,389 and $2,209, respectively, in 2011.
Looking forward, the International Lead and Zinc Study Group (Lisbon) sees global demand for refined lead growing 3.3 percent, to more than 11.1 million mt, as Chinese lead-acid battery production continues to recover. With world refined lead production forecast to rise 3.8 percent this year, to 11.3 million mt, ILZSG expects the refined lead metal surplus to widen to 174,000 mt. For zinc, rising Chinese interest will contribute to a rebound in global demand, but gains in output will again exceed the rise in usage, leaving the world refined zinc market with a surplus of 293,000 mt in 2013, ILZSG says. Despite the ongoing surpluses, Macquarie Capital (London) expects average lead and zinc prices to rise modestly this year, to $2,088 and $2,056 a mt, respectively.
Nickel and Stainless Steel
LME three-month nickel prices peaked in 2012 at $21,880 a mt in February, falling as low as $15,260 in August and finishing the year at $17,160, down 6 percent compared with the end of 2011. Though stainless steel production and demand for primary and recycled nickel products got off to a good start in 2012, market conditions deteriorated in the second half of the year, the International Nickel Study Group (Lisbon) reports.
Prestige Economics (Austin, Texas) sees the average nickel price improving to $18,200 a mt in 2013, with rising LME inventories and nickel pig iron substitution expected to limit the upside potential. Stainless steel scrap market participants remain hopeful that the recent startup of the Inoxum melt shop in Calvert, Ala., will boost the domestic scrap market. Globally, INSG forecasts that primary nickel use will increase 8 percent in 2013, to nearly 1.6 million mt.
Paper and Recovered Fiber
Weaker recovered paper prices, volatile freight rates, and slower domestic and export demand left many U.S. paper recyclers glad to see 2012 come to an end. As of September 2012, the ReMA Recovered Paper Index—an average of U.S. OCC, ONP, and mixed paper prices—was down 58 percent year on year. Domestic consumption of recovered paper slipped 4 percent through October 2012, the American Forest & Paper Association (Washington, D.C.) says. In the same period, export demand for U.S. scrap paper declined 6 percent by volume, to 18.6 million tons, and 10 percent by value, to $2.86 billion, on weaker sales to key markets such as China, India, Mexico, South Korea, and Canada, according to Census Bureau figures.
By the fourth quarter, however, recovered paper demand and prices showed signs of improvement. The Paper Stock Report (Cleveland) reported that its average recovered paper mill buying price had firmed from $109.52 a ton in late November to $113.08 in December. U.S. recovered paper consumption, meanwhile, increased 6 percent from September to October, to 2.49 million tons, AF&PA says. In addition, U.S. export sales of scrap paper to China rose to more than 1.4 million tons in October, the strongest shipments in nine months. With competitive U.S. recovered paper prices, rising Chinese demand, and potentially improving freight rates, paper recyclers had a brighter outlook going into the new year.
Joe Pickard is chief economist and director of commodities for ISRI.