January/February 1988
ISRI Takes Its Shot: The 1988 Market Forecast Unforeseen events can tear through any market forecast, no matter how sophisticated the research tools used in its construction. Knowing this, ReMA still decided to move ahead. Commodities Director Robert Garino, well-prepared for the projection game, pored over company reports and independent publications and made call after call to industry contacts. He considered, calculated, and considered again. Then he took his shot. Here now are his projections for copper, aluminum, lead, zinc, nickel/stainless steel, iron and steel, and waste paper for the year ahead.
By Robert J. Garino
Robert J. Garino is director of commodities for the Institute of Scrap Recycling Industries, Washington, D.C.
Oh, sure--forecasting markets sometimes seems worth no more than aiming a dart at a board, but ReMA decided to give it a sophisticated shot. First we settled on caveats. Then we developed market assumptions based on recent history and reliable macroeconomic data. (This information attempts to qualify and quantify the state of the U.S. and world economies.) Finally, after careful consideration of our information, calculation, and further consideration, we made our projections.
Unfortunately, even with the most sophisticated analytical tools, unforeseen events often play a disproportionate role in determining the direction of markets. Economists refer to these events as exogenous factors. In 1973 and 1979, for example, world economies were unprepared for the actions of OPEC (Organization of Petroleum Exporting Countries). All previous assumptions about the economic health of the U.S. were quickly discarded and revised.
In 1987, the so-called “Stock Market Crash” of October 19 may ultimately prove to be a significant negative indicator of future events. While many previously published forecasts about the U.S. economy included a downward stock market “correction,” the severity of the October stock market plunge took virtually everyone by surprise. Whether “Black Monday” proves to be the catalyst for a recession this year will not be known for many months to come.
ISRI’s forecasts, developed in the aftermath of that event, do not assume that a recession (defined as two consecutive quarters of negative growth in the Gross National Product) will occur. In fact, we anticipate modest growth in industrial production for 1988, with most of that occurring in the first two quarters of the new year.
Now for our 1988 market forecasts.
Copper
In the U.S., 1987 was characterized by a persistently tight supply of copper in the spot market, a situation that paved the way for near-record producer prices as the year progressed. By the start of the fourth quarter, domestic copper producers moved to 92 cents a pound, a level not seen since December 1980. By mid-November, producers were quoting above $1.10 a pound for cathode.
Adding to the supply tightness, underlying copper consumption remained healthy at most consuming levels. By mid-year, most published forecasts were expecting copper demand to exceed last year's 2.14 million metric tons (mt) by around 3 percent, or 2.20 million mt copper consumed.
With reports of tightness of refined copper, old and new scrap consumed by refineries, brass and wire rod mills, ingot makers, and foundries also picked up. Scrap purchases were running at around 5 percent higher through August, compared with 1986. Higher scrap values were in evidence with the published price of No. 2 copper (Metals Week) moving from 49.4 cents in January to 71.7 cents by October. The average for all of 1986 was 50.1 cents per pound.
Higher domestic demand plus higher scrap values help keep material from moving offshore. Scrap exports were expected to finish 1987 slightly below 1986, with most of the drop felt in the unalloyed grades of scrap. Exports of the alloyed grades of copper scrap were expected to end the year considerably above comparable 1986 numbers.
Outside the U.S., the situation was equally bullish as worldwide copper inventories were worked down to their lowest levels since 1973-1974. By October '87, LME cash values were approximately 20 cents per pound higher than in October '86. The widening backwardation in 1987 was described by one analyst as "the worst in recent history."
Producers in the U.S. and outside responded in 1987 by increasing output of concentrates, cathodes, and rod. This development was expected to be first felt in the last quarter of '87. Nevertheless, the supply/demand momentum of 1987, coupled with usually strong seasonal first- and second-quarter consumption prospects, should sustain copper values through early 1988. Producer prices should, therefore, remain in the upper 80 cents range before lower overall consumption, coupled with rising output, results in a halt to higher prices--to possibly below 70 cents per pound as the year progresses. The 1988 COMEX average: approximately 70 cents per pound.
Aluminum
The rise in aluminum prices in 1987 was impressive indeed. As measured by COMEX, cash prices, which averaged 52.4 cents at the start of the year, were termed "firm" at 81.0 cents by early November. That is an increase of more than 50 percent. Increases on the LME were equally impressive in 1987 as world supply/demand fundamentals firmly asserted themselves on the marketplace.
Major factors influencing the domestic aluminum market in 1987 included sharp reductions in visible stocks of aluminum as recorded by IPAI, COMEX, and the LME; limited stocks held by consumers and merchants; firm orders for mill products; the fact that new additions to world capacity had not overwhelmed the market; and the potential for an end-of-third quarter strike at Alcan.
U.S. consumption remained brisk with producers reportedly in a sold-out situation through November. Production rates recorded by the integrated producers were at levels not seen since 1985.
Scrap prices also responded to the demands of secondary smelters and mills with prices of scrap and alloy at levels not seen in several years. UBCs briefly touched an all-time high of 61 cents per pound in October before dipping lower.
Offshore demand for scrap aluminum in 1987 was higher than in 1986--up approximately 5 percent, mainly as a result of strong second-half '87 exports to Japan.
Although newly activated capacity will soon be felt in the market, good supply/demand fundamentals should keep ingot prices in the upper 70 cents per pound range through early 1988. There also exists the opposing view that ingot prices in 1987 did not accurately reflect aluminum's true balance and, thus, prices were inflated by speculators. Should this latter view prevail, prices could fall sharply as competition for available world supplies lessens in 1988. LME ingot prices are forecast to average around 70 cents in 1988, with highest prices recorded in the first two quarters of the year.
Lead
Following a weak first quarter 1987, in which lead prices posted consecutive monthly declines, the market responded to a gradual awareness of a worldwide supply tightness. On the LME, stocks dropped for 15 consecutive weeks, and U.S. refined output during the first quarter was 21 percent below comparable 1986 numbers. Further, secondary production was unchanged compared with the previous period.
The strength that ultimately emerged in the North American market was primarily due to reductions in supply-primary and secondary-coupled with a lengthy strike at Cominco. In addition, a summer shutdown by Doe Run and unexpected production problems in South America and Europe helped lower world supplies. By July, U.S. producers were posting prices in excess of 40 cents per pound, approximately 60 percent greater than the March '87 average lead price of 26.0 cents per pound. LME values also strengthened, but not nearly as fast. Consequently, the spread between the two markets--traditionally 5 to 6 cents per pound--widened to nearly 15 cents.
Higher lead values brought out more scrap batteries in 1987, reversing a trend in lower battery recovery rates, although still not achieving historic levels. But, significantly, secondary output was constrained due to permanent closures over the past several years. Higher domestic prices also kept scrap from leaving the U.S. Total exports of lead scrap were estimated to be lower in 1987 by one third, compared with the 1986 total of 65,034 tons.
Due to modest overall consumption prospects for 1988, and the likelihood of increased world refined output, there is evidence to suggest that prices will drift lower in the first half of 1988. As a result, the differential between the London and U.S. markets will narrow to more traditional spreads. However, lead prices in 1988 are not expected to move as sharply or as often as in recent history. Lead prices in the U.S. are, therefore, forecast to average in the lower 30 cents range for the year.
Zinc
The zinc market experienced an exceptionally strong year in 1987, primarily due to concern over supply-side fundamentals. The catalyst for higher prices that surfaced in the second quarter was the then-potential strike at
Cominco's zinc and lead refining complex in Canada. As the strike materialized, North American producer list prices quickly rose for the first time since October 1986, and the European Producer Price (EPP) went to $860 per mt.
Interestingly, virtually all attention was focused on the supply side of the equation. In the U.S., projected consumption of slab zinc in 1987 was slightly lower, by only around 1.5 percent based on seven months data, compared with 1986.
However, even less zinc usage was evident in Europe, as well as in Japan. Reports of shipment delays from Mexico and Peru kept prices steady on both sides of the Atlantic through the summer months. However, a slight crack in the market appeared in September, as the EPP was officially lowered to $820 per mt.
As the fourth quarter began, confirmed reports of steady demand from the consuming sectors in the U.S. kept zinc values at around the 40 cents mark. The EPP again moved higher, hitting $870 per mt by mid-November. Scrap was termed plentiful, and demand--domestic and offshore--kept prices relatively firm. Largely as a result of exceptional Taiwanese buying, scrap zinc exports were expected to finish 1987 approximately 20 percent higher than in 1986. Taiwan accounted for more than 80 percent of the total scrap zinc exported from the U.S.
If supply tightness drove zinc prices high in 1987, the concern for 1988 is one of a statistical surplus quickly emerging due to new and reactivated production and prospects for labor peace.
Consequently, zinc prices are likely to start off the year on unsure footing. In the U.S., zinc prices are forecast to average under 40 cents for 1988--mindful, however, that the U.S. is approximately 70 percent dependent on imported zinc. Should there be any unforeseen supply disruptions or continued heavy Asian buying, higher prices would be in the offing.
Nickel & Stainless Steel
Nickel markets responded firmly in 1987 to a number of developments, creating a genuine supply squeeze that surfaced in the second half of the year. Strong demand in the stainless steel and alloys sectors, coupled with summer production slowdowns and lower-than-anticipated deliveries of Russian nickel, kept LME prices at around the $2.60 a pound mark (melting grade) after briefly touching $2.91 in October. At the start of 1987, similar material on the LME was fetching $1.55 per pound.
Adding to the supply tightness was the fact that scrap supplies could not immediately and completely fill the void as scrap ratios increased at the expense of prime nickel. Despite a normally slow third quarter, producer stocks fell further, and consumers scrambled for nickel units--scrap, primary, and ferro-nickel. By August, mill buying prices for nickel-bearing stainless were at the highest levels in nearly three years. Due to this tightness, the rally in stainless steel scrap continued well into the fourth quarter.
Worldwide demand for stainless steel is expected to remain positive in 1988, and this should translate into higher primary nickel demand as well. Of special concern, however, is the ability of the major world producers to meet this projected demand. A major source of nickel is Russia, and the country remains a "wild card" in projecting quarterly supply/demand balances. With low stocks, tight supplies of scrap, and western producers at near capacity, East/West shipment will prove to be very significant in 1988.
Exports also play an important role in determining the availability of scrap for delivery to domestic consumers. For 1987, stainless steel scrap exports were, in fact, lower by approximately 15 percent compared with the previous year.
On the basis of continued strong demand for stainless and the supply constraints previously mentioned, prices for nickel may well exceed an average of $2.60 per pound forecast next year. Bottlenecks in supply could temporarily push prices considerably higher, possibly to $3.00 per pound.
Iron & Steel
For the steelmaking industry, expectations were not very high at the outset of 1987. Over-capacity, declining shipments, and relatively high levels of imports were believed to be strong negative factors. In addition, USX, which was idled August 1, 1986, was expected to cut prices in order to regain market share when they returned in early '87. However, the year turned surprisingly bright as many early assumptions proved either false or unfounded.
Demand was stronger than expected on top of a weakening dollar, which helped to fend off imports. Inventories were also worked down throughout the pipeline as steel producers made upward revisions in their total 1987 shipment estimates (about 74 million tons). One major question mark for the year was the possibility of an auto strike this past fall. It did not occur, and orders for flat rolled products remained firm; mills were thus able to increase prices across the board.
With steelmakers running above 80 percent capacity utilization rates; and EAF furnaces capturing a larger share of the market, demand for iron units intensified. Prices for premium grades of ferrous scrap rose quickly--some primary grades were sold at their highest levels in history at several steelmaking districts. With virtually no reserve capacity of pig iron production, and less home and industrial scrap available (due in part to increased efficiencies), domestic scrap prices showed no signs of easing during the traditionally quiet summer and early autumn months. October saw scrap surcharges instituted by the mills for certain products.
Exports of ferrous scrap received attention in 1987 despite the fact that they were running well below the pace of 1986, which was a record year.
For 1988, positive momentum should carry through into the early part of the year Total steel demand should remain positive. Therefore, firm demand and relatively high prices for scrap--especially the premium grades--is expected to be an important feature in 1988, in comparison with recent history.
Paper and Paperboard
By most market measures, 1987 was considered to be an exceptional year for the nation's packers and brokers of waste paper. Virtually all grades were positively affected by strong mill demand--from bulk grades to direct pulp substitutes.
Waste paper consumption in 1987 was expected to easily surpass the 4 percent growth recorded in 1986. More than 15 million tons of waste paper were consumed that year.
Along with a strong domestic market, offshore demand for paper stock was also brisk for most of the year, tapering off only as the year wound down. Through the first eight months of 1987, paper stock exports were running approximately 13 percent ahead of the previous year (2.8 millions tons versus 2.5 million tons). Asian demand dominated.
Despite the fact that the nation's paper mills were running at full capacity, seasonal aspects in the fourth quarter led to an apparent surplus in the brown grades of waste paper--old corrugated containers and double-lined craft cuttings. Prices eased slightly for these grades in certain geographic areas as large consumers exerted their influence.
On the plus side, the market for old news picked up as the year progressed. News, which is consistently sought by deinkers, came under added fourth-quarter pressure from cellulose insulators who are traditionally heavy buyers during this period. Supply was termed "tight" as old news approached $60.00 per ton on an FOB basis. Earlier this year, old news was quoted at around the $40.00 to $45.00 per ton mark.
Moving on to the higher grades of waste paper, the markets for white envelope cuttings and hard white remained strong throughout the year, as did ail other deinking grades. With paper mills announcing price increases for pulp in 1987, buying accelerated for the direct pulp substitutes in the second half.
Additional price increases for pulp are anticipated for early 1988. However, this should affect the deinking grades even more than the linear grades, which were already commanding prices in the $325.00 to $375.00 per ton (FOB) as 1987 ended.
Higher capacity utilization rates by the nation's 600 pulp, paper, and paperboard mills, plus solid overseas demand for paperstock, should translate into another positive year for the packing industry.
Unforeseen events can tear through any market forecast, no matter how sophisticated the research tools used in its construction. Knowing this, ReMA still decided to move ahead. Commodities Director Robert Garino, well-prepared for the projection game, pored over company reports and independent publications and made call after call to industry contacts. He considered, calculated, and considered again. Then he took his shot. Here now are his projections for copper, aluminum, lead, zinc, nickel/stainless steel, iron and steel, and waste paper for the year ahead.