ISRI's Market Forecast

Metals and paper soared in ’88--Will this flight plan be repeated in 1989?

By Robert J. Garino

Robert J. Garino is director of commodities for the Institute of Scrap Recycling Industries, Washington, D.C.

Remember these 1988 numbers?

$1.80 per pound--aluminum (June)

$1.50 per pound--copper (November)

$153.62 per gross ton--auto bundles (August)

$0.42 per pound--lead (November)

$10.80 per pound--nickel (March)

$0.72 per pound--zinc (November)

$760.00 per metric ton--bleached softwood pulp (November)

Virtually every 1988 forecast brave enough to link overall U.S. economic activity to the international metals and paper markets pointed to solid first-half 1988 business, followed by a second-half slowdown. Wrong, wrong, wrong.

It’s interesting that the same scenario was expected for 1987. What about 1989? Conventional wisdom again points to good first-half business followed by a second-half slowdown. Naturally the question that comes to mind is: Is 1989 the year the forecasters finally get it right?

The U.S. economy has experienced an unprecedented six years of sustained growth--but with it, a trillion dollars of debt. Thus, economists differ on what that portends for the years ahead. Many have predicted an early bout of inflation, followed by a severe recession--a so-called “hard landing” for the U.S. economy in 1989. Others disagree, citing a responsive Federal Reserve System and a continuing supply of foreign money as cushions should the U.S. economy falter.

The forecast by the Institute of Scrap Recycling Industries (ISRI) for the metals and paper industries in 1989 anticipates a cooling-off period. We do not expect a repeat of the highs posted in 1988, nor do we see any new all-time lows or crash landings. Now, often wrong--but never in doubt--we boldly go where few venture to fly ... ISRI’s 1989 market forecast.

Aluminum

The aluminum market started 1988 on a bullish note, spurred on by reports of tightening supplies worldwide. As the second quarter began, London Metal Exchange (LME) values reached an eight-year high.

Meanwhile, in the U.S., possible supply shortfalls dominated industry thinking in light of ongoing labor concerns in North America. The only weak spot reported was among domestic aluminum extruders, and by midyear some forecasters were looking at a softer market overall. However, visible stocks showed little improvement and, as LME inventories fell in May, prices again took off. On the LME, spot prices touched $1.80 per pound in early June, compared with an average price of $1.33 in May (spot), and 71 cents in June 1987.

The world market remained jittery through the summer as labor problems again posed new threats to the market. However, with settlement at Alcan coupled with improvement in the stock picture--especially LME inventories--the market eased off its hectic 1988 pace. By the fourth quarter, LME spot looked fairly stable and steady at over $ 1.00 per pound.

The 1989 outlook is promising: Published forecasts place world primary aluminum consumption slightly higher in'89 than in'88, along with increases in primary output, capacity utilization rates, and inventory. In the U.S., for example, Reynolds Metals Company is looking at 1989 domestic shipments of some 8.40 million short tons compared with 8.25 million short tons in 1988. Of concern is whether plant reactivations will lead to aluminum oversupply, thus impacting prices on the downside. Ingot prices could, it is reasoned, be well under $ 1.00 per pound by midyear 1989.

Copper

Last year began with a number of questions and uncertainties surrounding the outlook for the red metal. On January 4, 1988, Commodity Exchange, Inc. (COMEX), spot settled at $1.435 per pound. But over the ensuing quarter, copper dropped more than 50 cents, before climbing above the $ 1.00-per-pound mark as the second quarter got under way. Some metalmen questioned copper's strength, despite a persistent backwardation on both COMEX and the LME.

In the U.S., consumption remained positive and the specter of supply shortfall lingered in the minds of consumers. Not surprisingly, speculative buying added to the nervousness in the market. By the fourth quarter of 1988, after a very brief summer cool-down, the market heated up. Prices soared in November, surpassing the $1.46-per-pound record set December 31, 1987.

Setting the stage for 1989, then, were low refined stocks, overall supply uncertainties due to labor difficulties outside the U.S., and generally positive prospects for higher domestic consumption.

If supply tightness was a feature in 1987 and 1988, can we expect more of the same in 1989?

Eventually, supply will overtake demand, causing prices to weaken, but most private forecasts have underestimated copper's supply/ demand balance for the past two years. It is therefore reasonable to assume that, without clear signs that the U.S. and world economies are heading for a recession, copper around $1.00 per pound seems very likely indeed, but with prices peaking during the first half of 1989.

Iron and Steel

Following hectic 1987, 1988 began on a quieter note. Lower quotations were in evidence despite unusually cold weather, which was believed to be reducing the availability of certain grades of scrap. Even before the first quarter ended, however, strong mill demand pushed prices higher. Shipments of steel mill products in the first quarter, for example, were at levels not seen since the first quarter of 1981.

The market moved higher at the start of the summer on the assumption of continued strong demand and the perception that prepared scrap inventories were generally low, as well as the belief that the drought would curtail certain barge shipments. August auto bundles surpassed February's 14-year high.

As the final quarter of 1988 got underway, scrap values had again eased while forecasters were pointing to lower second-half steel shipments and growing finished steel inventories.

Most conventional forecasts are looking at lower steel shipments in 1989 compared with 1988. Consequently, ferrous scrap prices should moderate as the year progresses. Of special concern in 1989 is the impact of a possible industry steel strike (August 1989) and whether VRAs, due to expire after September, will be extended. One forecast put the composite price for No. 1 heavy melt at $99.90 per gross ton for the year--down nearly $9.00 from a 1988 estimate of $108.70.

Lead

The domestic lead market looked weak at the start of 1988, owing to negative seasonal factors and large imports of offshore metal. Lead, which had remained very steady through most of the second half of 1987, was being viewed as rapidly heading toward surplus and lower prices in 1988. This perception held on both sides of the Atlantic until May, when talk of labor problems at two North American mines helped lift the market.

By midyear, the LME was also reacting to new concerns over quality metal availability. In the U.S., the issue was also one of tightness in the physical market, and producers inched prices to over 40 cents per pound by the fourth quarter, matching the levels posted in fourth-quarter 1987.

Although some in the industry see a 1989 replay of late 1987-early 1988, others view the world lead market as finely balanced with little downside risk. Forecasts prepared by the International Lead and Zinc Study Group (ILZSG) point to a 2percent increase in lead consumption in 1988. In the U.S., it is forecast that producers will be hard put to keep pace with demand even if 1989 replacement and OE battery shipments prove to be lower than in 1988. Price, therefore, may show surprising stability in 1989, moving within the very narrow range of 32-38 cents per pound.

Nickel/Stainless Steel

Nickel's bull market, traced to unexpected and sustained strength in the stainless steel sector in 1987, carried through to 1988.

Exceptional strength in stainless, as well as in wrought and cast superalloys, led to near-panic buying in '88 as supply problems surfaced. Adding to the uncertainty were tenders by the U.S. Mint that soaked up large amounts of spot nickel.

By the end of the first quarter of 1988, 18-8 solids were fetching all-time-high prices, with nickel around the $4.00-per-pound mark. But this was only the beginning of even higher prices in the weeks and months ahead. As March ended, cash nickel on the LME moved to over $10.80 per pound as stocks approached the near-record lows of 1982.

By the third quarter, nickel and stainless steel market prices showed signs of consolidating, but reports of buoyant capital investment hinted that the market was not about to cool off. The supply situation showed a little improvement due to labor settlements in North America and the Caribbean. At the start of the fourth quarter, LME values dipped below $6.00 per pound for the first time since March.

Despite the relatively low levels of nickel stocks, the market appears to be anticipating an increase in nickel output in 1989, lower stainless demand due to high mill inventories, and a moderating pace of industrial activity. Forecasts put LME prices at around the $4.00-perpound mark, with weakness most apparent in the second half of 1989.

Paper Stock

At the top of 1988, the domestic paper and paperboard industries were anticipating a third consecutive year of record productivity and strong product demand. The nation's waste paper packers cited continued tightness in virgin pulp, coupled with a weakening U.S. dollar, as underpinning most markets for paper stock. If there was any softness to be found in waste paper it was in several of the brown grades, which packers termed weak due to normal seasonal patterns. By the third quarter of 1988, however, it appeared to some that paper stock markets were not quite what they were one year before, possibly because of continued weakness for certain grades of waste paper.

Meanwhile, paperboard production January through August was 3 percent above the 1987 rate, containerboard was being produced at record levels, and recycled paperboard production was up a solid 5 percent over the same 1987 period. Exports of paper stock were also well on their way to establishing a new record.

Questions again surfaced about many of the lower-valued grades of paper stock in the fourth quarter. At the same time, demand and prices were believed to be holding relatively firm for pulp substitutes and deinking grades. Bleached softwood pulp prices again moved higher in October. A January 1989 increase was also expected by some.

Although 1988 was paced by strong demand for communication papers and corrugated shipping containers, several industry sources expect this not to recur in 1989. Concerns over virgin pulp inventories have decreased, with overall production and demand not expected to set new records in 1989.

Zinc

The world zinc market was on sound footing as 1988 began: The U.S. market was termed steady with list prices of 45.5-46.0 cents per pound, while the European

Producer Price was poised at $890 per metric ton. Zinc fundamentals continued to improve over the early months of 1988, and as the first quarter ended, U.S. producers were posting list prices at 50 cents per pound.

Worldwide demand for zinc accelerated during the second quarter as the LME reached a 13-year high in April. The market continued to receive bullish influences due to reported refining problems, North and South American labor problems, bullish U.S. Mint bids, and higher offtake by the Chinese and the Soviet Union.

The market retreated over the summer months, but by the start of the third quarter zinc staged a strong comeback. Citing low metal availability, seasonal demand pickup, and other potentially bullish considerations (strikes in Peru and Chinese buying among them) prices surged to new records--72 cents per pound in the U.S., $1,425 per mt in Europe.

Consumption forecasts for 1989 prepared by the ILZSG anticipate a 2-percent increase over 1988, following 1988's 5-percent increase over 1987. Higher demand in both the U.S. and Europe coupled with low supplies of metal could push prices higher in early 1989. As with copper and aluminum, prices should moderate as 1989 progresses, averaging less than 60 cents per pound.•