Less Than Great Expectations—2001 Market Forecast

Exactly when the U.S. economy began its lofty ascent in the early 1990s is subject to some debate in business and academic circles. What we do know is that for most of the decade, economic prosperity dominated as in no other decade, according to many economists.

Thus, for the most part, the 1990s will be remembered as high-flying years that yielded record sales gains and profits for many domestic and international industries, especially those even remotely considered “high tech.” The stock market subsequently soared as consumers spent more and saved less than ever before. Unemployment dropped to 30-year lows, and inflation was held in check by an extremely responsive Federal Reserve.

Today, however, many are cautioning that it may be time to fasten one’s seatbelt in preparation for a return to earth and perhaps an overdue dose of economic reality. It’s uncertain, though, what kind of economic landing the United States could experience and when said landing could occur. Some predict a “hard” landing, while a few argue that we’ve already landed, crediting the Federal Reserve Board and its chairman, Alan Greenspan, for having mastered the use of monetary policy to sustain noninflationary growth these many years.

While the timing and nature of the much-discussed landing may be fuzzy, it’s clear that despite the many positives of the past nine years, not all sectors of the U.S. economy responded equally.

The Scrap Lag

The scrap processing and consuming industries can certainly attest to that.

Most will recall 1991 and 1992 as challenging years, even though the macroeconomic indicators suggested that a recovery began as early as the first quarter of 1991. For the scrap industry in general, recovery would have to wait until 1993-1994 as the U.S. economy grew 3 and 4 percent, respectively, for those years. Economic expansion was also apparent in Europe and the Pacific Rim, with only Japan unable to join the party.

Undoubtedly, 1995 was a good year for scrap processors and consumers. Industry consolidation was just beginning to roll, and the expectation was that 1996 would remain in the plus column. The stock market concurred with that assessment, and 1997 brought additional gains despite economic turmoil in Southeast Asia that threatened to derail global growth. As many will remember, there was a near-panic stock market selloff in October 1997 as Asia’s brush with financial meltdown threatened to spread around the world. But in the United States, the Dow Jones Industrial Average ultimately regrouped, ending the year 23 percent ahead of an equally impressive performance in 1996.

Troubles and Transitions

It wasn’t until 1998, though, that the domestic recycling industries felt the full effects of the Asian crises. The result? All major base nonferrous metals showed a negative price trend throughout the year. Also, ferrous scrap prices averaged $106 a gross ton for the year, 17 percent below the 1997 average. Recovered paper processors likewise saw average grades decline in price 20 percent for the year, prompting many to liken business conditions to the dark days of 1974.

Besides further scrap industry consolidation and much buzz about the potential of e-commerce, a less confident recycling industry was wondering: What else would 1999 bring?

As it turned out, 1999 brought recovery from the global turmoil of 1997 and 1998. It also raised expectations that 2000 would offer “synchronous global growth” and, hence, a return to prosperity and profitability. Some, however, cautiously labeled 1999 as a “transitional year” and worried that it would be dominated by concerns over the much-ballyhooed Y2K bug.

While Y2K turned out to be a complete nonevent, what was significant for the recycling industry in 1999 was that Superfund reform was finally passed, offering liability relief for scrap processors for their legitimate recycling transactions.

Remembering 2000

And how will 2000 be remembered?

Many in the scrap processing industries expected more from their respective consuming customers and, hence, anticipated better business conditions than what the year actually brought. Scrap consumption stuttered as the year progressed, as did commodity prices on the world commodity exchanges despite falling inventories. As a result, the optimism that was so apparent in the early months of 2000 gradually gave way to worries over lower growth prospects and reduced raw material buying for everything from No.1 HMS to OCC. Some firms wondered whether they would, in fact, survive the year.

Statistical evidence supported the anxiety being expressed at the end of the year. Through the third quarter, the nation’s gross domestic product (GDP) was growing at a tepid 2.4 percent annual rate—its slowest pace in four years. Consumer destocking, rapidly rising oil prices, global currency considerations, and an uncertain outcome to the November presidential election only added to the anxiety. It seemed that the fourth quarter—and the start of the new year—would promise nothing but change. For the recycling industry, that change wouldn’t necessarily be for the better.

On the macroeconomic front, virtually no one was expecting the United States to match its real GDP growth rates of 4.2 percent posted in 1999 or the November estimate provided by the Philadelphia Federal Reserve of 5.1 percent for all of 2000. At the same time, many economists appeared reasonably comfortable with growth numbers ranging from 2.5 to 3.5 percent for 2001.

For more than three years, the nation’s annual growth rate had averaged 4 percent or more, despite occasional quarterly dips. Thus, while lower growth is expected compared with recent years, it’s also worth remembering that in the 1990-1998 period, the average GDP growth rate was 2.9 percent.

Outside the United States, the Organization for Economic Cooperation and Development (OECD) (Paris) was also predicting slower—albeit still positive—growth overall. In November, OECD officials said that GDP growth for the OECD nations would slow from 4.3 percent in 2000 to 3.3 percent in 2001, with U.S. growth likewise downshifting from 5.2 percent in 2000 to 3.5 percent this year. The European Union is also expected to grow slower, from 3.4 percent in 2000 to 3 percent in 2001, according to OECD.

Meanwhile, total world growth is expected to slow in 2001 from 4.5 percent in 2000 to somewhere between 3.5 and 4 percent, according to Commonwealth Bank (Sydney, Australia). Weaker global demand, it says, “will tend to pressure base metal prices as we move through 2001.”

Thus, forecasts for the U.S. economy, the rest of the world in general, and many basic commodities grew progressively conservative in the closing weeks of 2000. Investors were clearly becoming disenchanted with growth and future earnings prospects for many industries, especially the tech-laden NASDAQ.

 While some were talking down the markets and basic industries, confidence rose following Alan Greenspan’s remarks in early December that strongly hinted that the Fed may be ready to cut interest rates for the first time in more than two years. For many, that was a signal that the Fed was less inclined to worry about the inflation potential and more concerned about the U.S. economy gliding to a soft landing in 2001.

A Look at 2001

Taking all of this economic mumbo-jumbo into account, what’s in store for 2001?

Lower economic growth seems universally accepted, though economists are reluctant to predict a full-blown recession anytime soon. The key phrase for 2001, it seems, is moderate growth, not retrenchment. One question is whether lower overall demand and, hence, reduced consumption of raw materials will translate into lower average commodity prices in 2001? And what about supply to meet the forecasted demand?

As we all know, each commodity has its own story to tell. So, here’s a commodity-by-commodity outlook for 2001 provided by those closest to the metals and paper industries. (One caveat: Price forecasts offered herein reflect the consensus as of November and December 2000.)

Aluminum

Aluminum was just one of the many commodities that didn’t live up to its advance billing for 2000. Despite the potential for record levels of Russian exports of ingot, analysts generally agreed that 2000 would see an overall statistical imbalance and positive demand, with prices expected to best the 1999 average.

While those general assumptions all proved correct, prices as measured on the LME didn’t quite perform as expected.

For 2001, Merrill Lynch & Co. (New York City) forecast in November an LME average price of 85 cents a pound, adding that it expects aluminum to break out of its five-year trading range of 62 to 73 cents. The company based its forecast on the significant ongoing reductions in inventory and “continued strong demand” expected in 2001.

Others echoed this positive fundamental outlook. According to The Spector Report, “the world aluminum industry’s statistical position is in great shape.” As 2000 ended, ingot inventories were near historic lows, and new supply was being restricted due to increased power costs in the Pacific Northwest.

The new year calls for a tight aluminum market, according to Marubeni Corp. (Tokyo). The trading company sees the Western World market recording a 408,000-mt shortfall in 2001, with prices ranging from $1,550 (70 cents a pound) to $1,700 a mt (77 cents a pound). Speaking at an aluminum conference last fall, Lloyd O’Carroll of BB&T Capital Markets (Richmond, Va.) sees prices ranging between $1,700 and $2,000 a mt “over the next two or three years.” Factors that will support the market include recovery in demand and supply constraints caused by high power costs, he said.

Still, not all are comfortable with the way 2000 ended, with some going so far as to lower their price forecasts for 2001. Macquarie Research (London), for one, scaled back its LME price forecast for the first quarter of 2001 to 75 cents as an average, highlighting consumption weakness in the United States and destocking that was apparent in the final months of 2000. Given the assumed backdrop of low inventories, however, the firm concedes that “a strong rally in prices could take place sometime in 2001.” For the year, Macquarie is calling for an 80-cent average for LME cash.

Copper

As 2000 began, copper prices on the LME and Comex offered considerable promise of even higher numbers as the year progressed. As it turned out, prices eased in the ensuing months before firming in the summer and peaking in mid-September. By October, prices fell sharply, visiting four-month lows.

Despite fundamentals that suggested firmness, CRU International Ltd. (London) pointed to higher oil prices, destocking, escalating violence in the Middle East, rising inflation in the United States, and weakness in leading economic indicators as factors that collectively contributed to undermine prices.

This year, demand and consumption prospects for copper appear reasonably bright, though opinions differ regarding realistic price averages. Standard Bank (London) is forecasting Western World refined consumption to increase to 12.9 million mt, 2.8 percent more than 2000. Consumption, the bank notes, continues to grow globally, with China playing a significant role as “the major source of extra demand” last year. Consequently, with the Western market expected to post another statistical deficit in 2001, the bank is forecasting an LME cash average of 95 cents a pound.

The International Copper Study Group (Lisbon), copper producers, and several independent analysts also expect another shortfall of new refined production compared with consumption. Even with higher production rates anticipated this year, accumulated aboveground stocks will have to be whittled down to meet the demand that, historically, is underestimated by analysts. Even with a revised lower consumption forecast, Bloomsbury Minerals Economics (London) is looking for LME prices to be around $1 a pound for the latter half of 2001 and almost 95 cents for the year as a whole. ED&F Man International Inc. (New York City) maintains that the red metal will “at least test 95 cents in the first or second quarter,” factoring in peak seasonal buying.

Though it seemed that more forecasts were calling for an average of 90 cents or better, Alan Williamson of HSBC Holdings plc (London) and others assert that the consensus is “too complacent on copper.” In his view, global consumption could grow just under 2 percent for the year as consumers destock to the point where the assumed Western World deficit becomes a non-factor in the equation. His conclusion? Copper prices will average 82 cents.

Carr Futures Inc. (New York City) also sees weaker global demand (including China) and, thus, forecasts a lower average price of 801/2 cents. And, in a report published Dec. 1, Morgan Stanley Dean Witter (New York City) projected an 85-cent average for 2001.

Iron & Steel

For the U.S. steel industry, 2000 was dominated by high levels of low-priced steel imports and scrap substitutes, rapidly rising energy costs, production outages and cutbacks, layoffs, falling ferrous scrap prices, and—consequently—a profound loss of confidence in financial and industry circles. Raw steel capacity utilization fell from the mid-90s-percent level in the spring to the low-70s in the final months of the year.

The strong domestic demand experienced in the early months quickly gave way to reduced orders and higher imports that approached the all-time record of 41.5 million net tons set in 1998. Steel prices sagged as a result. On the scrap side, the published No.1 HMS composite price, which began the year at $114.50 a gross ton, ended the year at $76.50, or 33 percent lower.

The basic problem is that steelmakers around the globe continue to produce too much steel relative to demand. According to most industry research, steelmakers worldwide have the capacity to produce around 870 million mt, almost 15 percent more than can be consumed. To illustrate, the International Iron and Steel Institute (IISI) (Brussels, Belgium) placed world demand in 2000 at 738.5 million mt, or 85 percent of the available capacity.

For 2001, IISI says apparent consumption will total 769.2 million mt, or 4.1 percent greater than 2000. U.S. steel consumption, meanwhile, is expected to total 114.8 million mt, virtually unchanged from IISI’s 2000 estimate of 114.9 million mt.

Steel demand, of course, is strongly influenced by the construction and automotive industries, which tend to lead big economic cycles. The principal fear is that the world economy is slowing down. Steel analysts also worry that in spite of a slower U.S. domestic economy, imports will continue to be attracted to the United States, keeping pressure on finished prices and scrap well into 2001.

Thus, expectations for the steel industry in general—and scrap processors in particular—are termed modest at best for the first half. If global activity begins to accelerate as some predict, however, prices on all fronts should trend higher in the third and fourth quarters.

Lead & Zinc

The International Lead and Zinc Study Group (ILZSG) (London) projected that lead consumption would increase 2.8 percent in 2000 and an additional 2.2 percent this year, bringing Western World demand to 5.66 million mt and total world demand to 6.54 million mt. In the United States, growth is expected to continue at a 1.4-percent annual rate, paced by automotive replacement batteries, while European demand is forecast to remain at the same level as last year, ILZSG says. 

As with 2000, Asian consumption is expected to set the pace for overall lead usage.

Taking into account new supply, net exports from Eastern European countries, and releases from the U.S. national stockpile, ILZSG anticipates a “small” market surplus in 2001. Others also expect a surplus this year, albeit a lower one than those seen in 1999 and 2000. Concentrate shortages that will lower refined lead output, stronger-than-expected demand from China, and lower Chinese lead exports are giving domestic primary and secondary lead producers reason for optimism this year.

On a more bullish tack, Barclays Capital (London) asserts that lead prices could increase “substantially” in the next two years in response to what it sees as a growing supply-side deficit. Barclays’ optimism relies on what it sees as changing market dynamics in China—namely, a reduction of the country’s exports of refined lead. Still, though the company sees the market heading for a shortfall in 2001, its average price forecast remains conservative at 21 cents a pound for the year.

Also picking up on the deficit theme is Dick Amistadi of Doe Run Co. (St. Louis). In his view, less material available from both China and Australia should be enough to create a global deficit for refined lead in 2001.

Amistadi asserts that this “supply-driven” market could support LME lead prices in the mid-20s-cents by year’s end.

Others are less convinced that refined lead will be statistically short in 2001, though they agree that China’s influence on the Western market will dwindle as its net exports trend lower. Even with a market in surplus, however, most price forecasts offered for 2001 fall within a range of 21 to 26 cents a pound on an LME cash basis.

As for zinc, ILZSG sees world consumption ending 2000 at 8.68 million mt, 3.3 percent higher than 1999, while Western World usage could be 6.95 million mt, up 3.2 percent. Demand in the United States, meanwhile, was expected to finish last year 2.6 percent greater than 1999. Matching the expected demand against supply (including net exports from Eastern European sources and the U.S. stockpile), ILZSG says 2000 most likely ended with a “modest surplus.”

Others maintain that the market ended 2000 in deficit. While Standard Bank agrees with ILZSG’s consumption numbers, for instance, it asserts that the study group overestimated new production.

Looking ahead to 2001, ILZSG is expecting new production to grow faster than demand, with net exports remaining essentially unchanged from 2000. The result, the group says, will be a “substantial Western World market surplus” in 2001. Again, Standard Bank’s analysis is close on the consumption forecast but differs on the production estimate for this year. In contrast to ILZSG, the bank sees a market in deficit, with the LME averaging 57 cents for the year.

Macquarie Research says the outlook for zinc remains “robust,” though demand will slow in 2001, “particularly in the U.S. and Europe.” In addition, mine output will grow, with refined metal expanding faster than demand. Consequently, given weaker demand expected this year, the company predicts that the Western World market will move into balance, following a 40,000-mt deficit in 2000. For an average price, Macquarie expects LME cash zinc to settle at 521/2 cents a pound.

Merrill Lynch predicts an average zinc price of 51 cents this year while lowering its longer-term view due to what it sees as an “abundant oversupply” of refined metal in the marketplace over the next several years. 

Taking a more bearish position, the firm forecasts a refined zinc surplus of 117,000 mt in 2001, growing to 285,000 mt by 2004.

Nickel & Stainless Steel

Nickel’s Western World supply-and-demand fundamentals in 2000 showed a market in a statistical shortfall but unable to translate that deficit into higher average prices. Nickel’s trend line, in fact, showed a negative slope for the year. Analysts attribute this to falling demand and cutbacks at stainless steel mills, plus destocking along the supply chain, all exacerbated by a ready supply of scrap. (It’s important to recall that the stainless steel sector accounts for two-thirds of nickel demand.)

As 2000 ended, finished stainless steel prices were expected to ease further into the first quarter of 2001 as mills and service centers continued to run down inventories. According to U.K. analysts MEPS, stainless producers are anticipating cheaper raw material prices in 2001 and are, thus, anxious to shed as much inventory as possible. Nickel prices, they believe, were also being propped up by the uncertainties created by the lengthy strike at Falconbridge’s operation in Canada, which began in August. Lower LME prices, they say, will follow the eventual settlement.

Many also assert that the nickel market will return to surplus in 2001, bringing with it lower expectations for nickel prices. The International Nickel Study Group (London), for example, forecasts a 35,000-mt world surplus following an estimated 9,000-mt deficit in 2000. Macquarie Research sees nickel production increasing faster than consumption this year, leading to a Western World surplus of 15,000 mt. The firm also lowered its price forecast for 2001 from $3.50 to $3.15 a pound. Standard Bank came up with a similar surplus but maintained a higher average price for LME cash of $3.75.

In 2001, global stainless steel output could reach 19.96 million mt, with the United States producing 2.42 million mt, up 2.1 percent compared with 2000, according to Heinz Pariser of Heinz H. Pariser Alloy Metals & Steel Market Research (Xanten, Germany). To meet this demand, 650,000 mt of nickel would be required along with 5.5 million mt of nickel-containing scrap. Based on Pariser’s LME cash nickel price forecast of $2.95 a pound, stainless steel scrap prices would average $750 a mt compared with $860 in 2000.

Paper & Paperboard

By most measures, 2000 ended on a downbeat for scrap paper processors, continuing a negative price trend for many grades that some traced to the second quarter of the year. According to the American Forest & Paper Association (AFPA) (Washington, D.C.), total domestic mill consumption was estimated to have increased 2.2 percent in 2000 compared 2.6 percent in 1999.

A number of contributing factors worked against recovered paper markets in 2000. Industry participants specifically cited extensive and widespread mill downtimes and destocking, the strong dollar (which inhibited exports), and a ready supply of low-cost wood chips and market pulp that ultimately affected all grades—from OCC to high-grade pulp subs. In contrast, ONP proved to be a bright spot for most of the year due to heavy demand from the newsprint sector.

Few in the pulp and paper industries expect an uptick in the early months of the new year. 

Merrill Lynch sees price weakness in early 2001 in market pulp and coated papers. In light of anticipated high inventories in 2001, the company expects pulp prices to average some 6 percent lower than its 2000 estimate. At the same time, newsprint and containerboard prices should be able to hold at fourth-quarter 2000 levels by initiating “aggressive downtime” to regulate market demand, Merrill Lynch notes.

Resource Information Systems Inc. (RISI) (Bedford, Mass.) offered little encouragement for recovered paper markets for the first half of 2001. Following what it sees as a “brief period of loose demand/supply conditions and lower prices in the first half of 2001,” the group expects the industry to recover and enter a period of improved conditions in both the United States and Europe. This could lead to a “sustained period” of higher recovered paper prices, RISI states. AFPA forecasts that recovered paper consumption will grow an average of 2.2 percent a year from 2000 through 2003.

For 2001, RISI projects that OCC (11) could average $90 a ton compared with $82 in 2000. ONP (6) could also be lower this year at $56 a ton compared with $59 last year. •