January/February 2012
2012 Market Forecast
U.S. scrap recyclers faced choppy economic waters in 2011 due to slow GDP growth, political gridlock, and the European sovereign debt crisis, among other issues. With the likelihood of continued instability, many wonder how to keep their balance in the year ahead.
By Joe Pickard
At the end of 2010, many economic forecasters expected the U.S. economy to continue to grow into 2011, albeit at a moderately slower pace. The International Monetary Fund (Washington, D.C.), for example, predicted at this time last year that U.S. economic growth would slow from 2.6 percent in 2010 to 2.3 percent in 2011. As it turned out, the U.S. economy grew more than expected in 2010, increasing 3 percent for the year. The first three quarters of 2011 were another story, however, with growth well below expectations. According to the latest figures from the U.S. Department of Commerce’s Bureau of Economic Analysis (Washington, D.C.), the U.S. economy expanded only 0.4 percent in the first quarter of 2011 and less than 2 percent in the second and third quarters. This lackluster and uneven growth, combined with stubbornly high unemployment rates, gave many the impression that the U.S. economy was barely treading water despite nine consecutive quarters of continued expansion.
The less-than-impressive movement on the economic surface masked much more turbulent waters below, however. A case in point is the wave machine known as Wall Street. In 2011, the Dow Jones Industrial Average gained or lost at least 200 points on more than 35 occasions, including seven 400-plus point swings. (In comparison, there were no daily swings of 400 points or more in 2010.) Commodity markets also have been sending investors on some wild rides lately. Copper prices on the London Metal Exchange, which crested at more than $10,100 a mt in February, had lost fully one-third of their value by October. To some, the sharp daily swings were a sign of excessive speculative activity by investment funds and other groups. But few would question that today’s market jitters also stem from considerable uncertainty about what’s coming next, especially in the wake of 2008’s Great Recession.
In the United States, for much of 2011, a long list of economic worries—including still-high levels of unemployment, the depressed housing market, increasing income inequality, and political gridlock in Washington—contributed to a general sense of unease about the nation’s longer-term prospects for economic prosperity. Standard & Poor’s (New York) downgrade of the U.S. long-term sovereign debt rating from AAA to AA+ in August didn’t help matters, either. These and other factors led economists to slash their U.S. growth forecasts. In November, the Federal Reserve (Washington, D.C.) cut its 2012 gross domestic product growth projections for the United States to a range of 2.5 to 2.9 percent, down from the 3.3 to 3.7 percent growth it previously forecast.
But by the end of the year, a batch of domestic economic data began pointing in a more positive direction. Though still high by historical standards, the unemployment rate dropped to 8.6 percent in November—down four-tenths of a percentage point from October—while in December, weekly initial unemployment claims dipped to levels not seen since April 2008, according to the U.S. Department of Labor’s Bureau of Labor Statistics (Washington, D.C.). In addition, figures from the U.S. Bureau of the Census (Suitland, Md.) revealed that durable goods orders advanced 3.8 percent month on month in November, at a time when retail sales were rising, but both consumer and producer price increases (i.e., inflation) remained largely in check. Even the beleaguered housing market began to show some signs of life toward the end of the year, with new housing starts and building permits up 9.3 percent and 5.7 percent, respectively, in November as interest rates remained remarkably low. As a result, both the Conference Board’s consumer confidence index and the University of Michigan’s consumer sentiment index posted solid gains in December, and forecasters began to revisit their 2012 assumptions once again. Most recently, the consensus forecast from a poll of three dozen economists by the Associated Press indicates the U.S. economy will grow 2.4 percent this year—not enough to make much of a dent in unemployment levels, but most likely an improvement over 2011.
Of course, forces outside the United States are shaping the 2012 economic outlook as much as those within it. The biggest source of anxiety today lies across the Atlantic. What started as a sovereign debt crisis in Greece and along the European periphery is now widely seen as having the potential to swell into a full-fledged financial crisis. Despite repeated assurances by Europe’s political leaders that they have the situation under control, bond markets and credit rating agencies remain largely unconvinced, as evidenced by the recent fluctuations in Italian and Spanish bond yields and a series of credit downgrade warnings, notably for France.
As the fate of the euro hangs in the balance, a key question for Europe in 2012 is whether the countries that share the common currency will strengthen their economic ties or allow them to unravel. German Chancellor Angela Merkel recently confirmed her commitment to closer European integration, reportedly stating, “We aren’t just talking about a fiscal union … rather, we have begun creating one,” according to Der Spiegel magazine. Recent moves by the European Central Bank (Frankfurt, Germany) seem to support that approach. After it offered to extend lending terms to banks out to three years, the ECB reported in December that more than 500 banks had signed up to borrow nearly €490 billion, or about US$640 billion. Even so, the economic outlook for Europe next year remains bleak, with the European Commission forecasting 0.5 percent growth in the eurozone in 2012 as others fear Europe is already slipping back into recession.
As if the threats Europe poses to the global economy weren’t enough, China’s ability to orchestrate a “soft landing” this year recently has joined the list of economic concerns. Although the pace of economic expansion in China remains rapid by almost any standard, official figures from China’s National Bureau of Statistics (Beijing) show consecutive decreases in the rate of the country’s GDP growth in the second and third quarters of 2011. Other indicators suggest that Chinese economic deceleration might be even more pronounced than the official numbers reveal. In December, the flash purchasing managers’ index for China came in at 49.0, a modest improvement over November’s final PMI reading of 47.7 but still signaling contraction in the manufacturing sector. After the release of November’s disappointing PMI figure, the People’s Bank of China (Beijing) announced it was cutting banks’ reserve ratio by 0.5 percentage point for the first time since December 2008, one sign that Beijing might be getting more concerned about promoting growth than it’s concerned about fanning inflation. Given the ongoing economic problems in the developed economies, a sharp slowdown in one of the world’s most vibrant economies and voracious consumers of commodities has the potential to make serious waves, although few forecasters are calling for that to happen just yet. Jan Hatzius, chief economist at Goldman Sachs Group (New York), expects China’s economy still to grow about 8.5 percent in 2012.
Some of the biggest known challenges heading into 2012 will be maintaining growth in China, Europe, and the United States. Add to those the unknown challenges the world will face this year. Looking at last year, for example, few, if any, analysts predicted the Arab Spring uprisings that captured the world’s attention, nor did anyone foresee the earthquake and giant tsunami that struck Japan in March, severely affecting global supply chains. Whether 2012 will bring surprises of a similar or even greater magnitude, only time will tell. What seems probable is that today’s heightened economic uncertainty will stay with us through 2012, especially given the current state of the U.S. labor and housing markets, the need to balance government finances in the long term without choking off growth in the short term, and the growing skepticism that politicians will be able to agree on any meaningful solutions. All that uncertainty could translate into turbulent market conditions again this year, as it did in 2011. So even if overall economic growth doesn’t make a big splash—the IMF currently expects global economic growth to hover around 4 percent this year—there might still be some big waves ahead. In such conditions, the trick is to keep your balance and keep moving at the same time. That’s the big picture; here’s a look at recent developments and potential trends for some of the major scrap commodity groups.
Aluminum
As with commodities in general and the other nonferrous metals in particular, the shifting economic tides in Europe and elsewhere continue to strongly affect aluminum prices. At the start of 2011, the light metal was riding high. It continued to climb higher through the start of the second quarter, with official three-month LME prices peaking around $2,774 a mt in late April. But as the economic outlook in Europe bottomed out, so did aluminum prices. By late December, LME aluminum prices were down more than $800 a mt from their peak as LME aluminum inventories surged to record levels, approaching 5 million mt. What’s interesting is that as LME aluminum inventories soared, reports of long delivery lines at key LME warehouses also surfaced, as large tonnages of canceled warrants, combined with slow load-out rates, translated into longer waiting times for stock deliveries.
Despite the pounding in exchange prices, physical market demand for aluminum was reportedly on the rise in 2011, with the CRU Group (London) estimating that world consumption of primary aluminum through November 2011 was up nearly 9 percent from 2010 levels, to approximately 40.8 million mt, thanks in part to expanding demand in China and the Middle East. In the United States, the Aluminum Association’s (Arlington, Va.) index of new orders of aluminum mill products continued to advance late into 2011. Meanwhile, the Macquarie Group (London) reports that U.S. aluminum shipments from service centers in January to November 2011 were up 15.5 percent compared with that period in 2010.
Looking forward, forecasters widely expect improving global demand and relatively high production costs to put a floor under aluminum prices this year. UBS (Zurich), for example, expects Chinese automotive, housing, and infrastructure demand to help increase average global aluminum consumption 7.2 percent a year until 2015. Not all forecasters are equally optimistic, though: Commerzbank (Frankfurt, Germany) recently lowered its 2012 aluminum price forecast to $2,400 a mt, down from the $2,450 a mt it expects the metal will have averaged in 2011. And Svein Richard Brandtzaeg, president and CEO of Norsk Hydro (Oslo, Norway), recently was quoted saying that if aluminum prices stay under $2,000 a mt for an extended period of time, “the chances for shutdowns are increasing.”
Copper
As with aluminum prices, copper prices have been extremely volatile over the past year, also due in good measure to heightened investor sensitivity to global economic events. Last year, the exchanges saw daily copper price swings of 15, 20, and even 25 cents a pound as market participants scrambled to keep up with the latest news and events. Over the course of 2011, official LME three-month copper prices plunged 33 percent from peak to trough, dropping from a high of more than $10,00 a mt in February to as low as $6,812 a mt in October. Questions remain as to whether market fundamentals warrant such wild swings in the red metal’s prices.
The International Copper Study Group (Lisbon, Portugal) reported in December that the global refined copper market had a deficit of 170,000 mt in the first nine months of 2011, as supply-side problems remain an overriding concern. Macquarie reports that Chilean copper output was down 3.9 percent, to 4.28 million mt, in the January-to-November period in 2011 compared with that period in 2010, while workers at Freeport-McMoran’s Grasberg mine in Timika, Papua, Indonesia, recently voted to extend their strike into January 2012. Global demand for copper scrap also has been on the rise: Recent ICSG data show secondary refined production (production from scrap) was up 12 percent, to nearly 2.7 million mt, through September 2011, compared with that period in 2010. Commerce Department trade data confirm the trend, showing U.S. copper and copper alloy scrap exports through October up 23 percent by volume, to more than 1 million mt, year on year.
Copper market deficits are expected to continue into 2012, with ICSG forecasting the global deficit widening to 256,000 mt this year. But economic perceptions, as much as copper supply/demand fundamentals, are likely to determine copper prices in the year ahead. As such, the World Bank’s Economic Policy and Prospects Group (Washington, D.C.) forecast in November that the average copper price will ease from an expected $8,800 a mt in 2011 to $8,750 a mt in 2012, rebounding to $9,000 a mt in 2013.
Iron and Steel
Although finished steel and ferrous scrap prices traditionally move in tandem, that was not always the case in 2011. For months at a time, U.S. flat-rolled steel prices and ferrous scrap prices moved in different directions. As it did with other metals, overseas demand provided some of the support last year for ferrous scrap prices, which Scrap Price Bulletin (New York) reports reached an all-time high in 2011. Commerce Department data indicate that ferrous scrap exports through October 2011 jumped 47 percent by value, to $8.9 billion—already surpassing the total for all of 2010—and 26 percent by volume, to nearly 20.2 million mt.
Increased steel output at home also helped, as better demand from the U.S. automotive, energy, and agribusiness sectors led to a 9.4-percent jump in U.S. steel mill shipments through October, to 76.4 million tons, according to figures from the American Iron and Steel Institute (Washington, D.C.). Expectations for continued growth in demand led to a recent series of capacity expansion projects, including Gerdau Long Steel North America’s (Tampa, Fla.) $67 million investment to expand production at its Monroe, Mich., facility and the $550 million project at OAO Severstal’s (Moscow) plant in Columbus, Miss., designed to double the plant’s annual capacity to 3.4 million tons.
But as it is with other commodities, China remains the key to the global steel market. Although global steel output through November increased 7.4 percent, year on year, to 1.37 billion mt, the World Steel Association (Brussels) reports that China’s crude steel production was 0.2 percent lower in November 2011 than it was in November 2010. In addition, Platts (New York) reports that China eliminated 11.86 million mt of steel capacity in 2010, surpassing the original target of a reduction of 7.53 million mt of capacity, as China continues to promote industry consolidation in an attempt to reduce supply fluctuations and price volatility. Given 2011’s improved steel production and capacity utilization rates, many analysts expect to see firmer finished steel and scrap market conditions heading into 2012, with Goldman Sachs recently predicting that finished steel demand in the United States will increase 5.9 percent from 2011 to 2012.
Lead And Zinc
Official LME 3-month lead and zinc prices dropped more than 20 percent from the end of 2010 to the end of 2011. For the sister metals, physical market surpluses compounded the overarching economic uncertainty that affected all the base metals. In December, the International Lead and Zinc Study Group (Lisbon, Portugal) reported that, in the January to October period, the world refined lead market had a surplus of 159,000 mt, while the global refined zinc market had an even larger surplus of 308,000 mt. Those figures were largely in line with earlier ILZSG forecasts that 2011’s refined lead and zinc output would exceed demand by 188,000 mt and 317,000 mt, respectively. Even though ILZSG forecasts that market surpluses will moderate this year, it still expects gains in global supply to continue to outstrip demand, resulting in a 2012 global lead market surplus of 97,000 mt and a global zinc market surplus of 135,000 mt.
Meanwhile, Macquarie reports that, as of late 2011, year-to-date LME lead stocks were up nearly 70 percent and LME and Shanghai zinc stocks increased 17 percent and 19 percent, respectively. It’s notable that, among the base metals, only lead metal scrap export shipments from the United States declined during the first 10 months of 2011, falling nearly 34 percent, to less than 27,000 mt. In the zinc market, however, despite the recent declines in prices and the significant build-up in exchange stocks last year, Macquarie indicates the physical zinc market might be tighter than it first appears, as low load-out rates at LME warehouses contribute to artificial market tightness. Nevertheless, given the relatively soft fundamental picture and murky economic outlook in China and elsewhere, most forecasters seem to be looking for flat to weaker prices for these metals in 2012. The World Bank predicts an average zinc price of $2,100 a mt and an average lead price of $2,250 a mt this year.
Nickel and Stainless Steel
Nickel was among the metals that saw severe price volatility in 2011, with LME official three-month nickel prices ranging from $29,075 a mt in February to $16,950 a mt in late November. Unlike metals such as aluminum, zinc, and lead, however, LME nickel stocks decreased in 2011, falling about 33 percent over the course of the year, according to Macquarie Research. The drawdown in LME stocks came at a time of relatively balanced nickel market conditions. The International Nickel Study Group (Lisbon, Portugal) had forecast only a small global nickel market surplus for 2011, following the reported 40,000 mt surplus in 2010, as well as improving stainless steel demand early in the year. The International Stainless Steel Forum (Brussels) reported that global production of stainless and heat-resisting steel crude increased approximately 4 percent in the first half of 2011, while the global stainless steel demand index for all flat-rolled products was pointing up in the second half of the year.
That said, elevated nickel prices, an influx of nickel pig iron production, and fears of a sluggish global economy all took a toll on market sentiment, prompting many forecasters to slash their nickel price forecasts. Even though it is bullish on nickel’s long-term prospects, citing “limited proven reserves and rising per capita consumption,” Prestige Economics (Austin, Texas) recently cut its average nickel price projections for 2012 and 2013 to $19,500 a mt and $21,000 a mt, respectively. Meanwhile, INSG indicates a possibility of a bigger build-up in nickel stocks in 2012 depending on how quickly new projects ramp up.
Paper and Recovered Fiber
For much of 2011, recovered paper prices remained elevated, supported by healthy overseas demand for much of the year, prompting attendees at a recent Bureau of International Recycling (Brussels) Paper Division meeting to declare that prices were the best they had seen in their lifetimes. With improved demand for U.S. OCC, high-grade deinking, and pulp substitutes, U.S. exports of recovered paper through October 2011 were up 18 percent by value, to nearly $3.2 billion, and 13 percent in volume, to 19.4 million short tons, according to recent Commerce Department figures. But the old saying that what goes up must come down proved to be the case for recovered paper prices in the fourth quarter of 2011. As weaker demand expectations in the United States and Europe and abundant supplies in China reportedly weighed on prices, the ReMA Recovered Paper Index plunged nearly 20 percent in November alone, and certain grades experienced even sharper drops.
According to The Paper Stock Report (Cleveland), though most recovered paper grades continued to decline in early December, prices might have bottomed out since then: Overseas demand, including Chinese mill demand for OCC, began “showing signs of new life” again in late 2011. Considerable uncertainty continues to surround Chinese demand in January and beyond, due in part to the early Chinese New Year cele-brations and timing of import license renewals. As it is in many other segments of the economy, turbulence in the recovered paper market might be on the rise in 2012.
Joe Pickard is chief economist and director of commodities for ISRI.