January/February 2010
At this time last year, the U.S. economy was practically roadkill, part of a multitrillion-dollar global recession. Signs of renewed life began to emerge in the third quarter, and most analysts now expect global market confidence to return —slowly but surely—in 2010.
By almost any socioeconomic measure, the past 18 months have been one of the more dramatic periods in U.S. history, as the country's more than $14 trillion economy sank into a severe, prolonged recession that rattled its economic underpinnings and far surpassed the deep downturns of 1973 and 1981. The United States was not alone in this financial meltdown, of course. The forces of globalization ensured that the turmoil spread to other major economies around the world. Though the most severe period of recession hit in fall 2008, the downturn officially began in December 2007, according to the National Bureau of Economic Research (Cambridge, Mass.). Now, two years later, most agree that this contraction could prove to be the worst economic slump since the Great Depression.
So has the worst of the recession passed? Many economists believe so. Though NBER has yet to declare an "official" end to this recession, about 75 percent of forecasters surveyed in the fourth quarter by the National Association for Business Economics (Washington, D.C.) believe the recession ended in the third quarter, with 19 percent pegging the final months of last year as the conclusion. The U.S. and other major economies around the world are likely to see 2010 as a growth year for industrial production and international trade, forecasters say, though the growth will be modest compared with previous economic recoveries. As Louis Navellier of Navellier & Associates (Reno, Nev.) observed in November, "We seem to have dodged the financial Armageddon we faced at this time last year."
One encouraging sign is that preliminary third-quarter figures indicate the U.S. gross domestic product grew at a 2.8 percent annual rate, marking the first increase in U.S. GDP since the second quarter of 2008. Adding to the positive sentiment, Federal Reserve Chairman Ben Bernanke remarked in November that "financial conditions are considerably better" in the United States compared with November 2008, but challenges remain in the form of constrained credit, weak economic activity, and high unemployment.
The global economy also has returned to positive growth "following dramatic declines," the International Monetary Fund (Washington, D.C.) noted in November. The IMF acknowledged, however, that recovery in the developed economies is "uneven" at best and still "far from normal." Consequently, recovery will "likely be sluggish," though the downside risk is lower going forward and inflation will remain low in 2010, the IMF said. It expects world output to increase 3.1 percent in 2010, a considerable improvement over the estimated 1.1-percent decline for all of 2009. U.S. GDP could rise 1.5 percent after a projected decline of 2.7 percent last year, the IMF said in November.
The November forecast of the Organization for Economic Cooperation and Development (Paris) was more optimistic. The OECD sees the U.S. economy growing at a 2.5-percent rate this year, up from the group's June 2009 forecast of 0.9 percent. Collectively, the OECD industrialized nations could expand 1.9 percent in 2010, with economic growth likely to "fluctuate around a modest underlying rate for some time to come."
Brazil, Russia, India, and China—the BRIC nations—will continue to lead global growth, according to the IMF and others, with China's GDP poised to rise 9 percent in 2010, up slightly from its estimated 8.5-percent growth last year. Spurring that growth is China's $586 billion stimulus plan, which has focused largely on infrastructure projects. Its plan directed more than 60 percent of the stimulus funds toward construction, whereas the U.S. stimulus package, valued at $787 billion, dedicated its largest portion to tax relief and has yet to reach its full potential and economic impact.
Europe, meanwhile, seems to have joined the United States and Japan out of recession, with recent figures from Eurostat—the European Union's statistics office—showing that GDP in the 16-country Eurozone grew 0.4 percent in the third quarter and the 27-nation EU inched up 0.3 percent. These third-quarter increases— the first in six quarters—ended Europe's sharpest recession since World War II. Japan's recession reportedly ended in the second quarter, when its economy—the second largest in the world—rose 0.3 percent over the previous quarter. Japan's economy also grew at a 1.3-percent annual rate in the third quarter.
Up From the Bottom
The U.S. credit crisis and economic recession pummeled key metal-intensive markets and transacted prices starting in the third quarter of 2008, depressing the construction, automotive, and industrial equipment industries with alarming intensity. The 2008- 2009 downturn brought "some of the biggest-ever contractions in metals consumption," according to Barclays Capital (London), and the recycling industry wasn't immune to the negative trends. Scrap prices plunged in the second half of 2008, resulting in widespread contract defaults, renegotiations, and cancellations for material already shipped. Demand and consumption fell across the board, leading to bankruptcies and shutdowns of some consumers and processors of scrap. Further, as manufacturing activity slowed, so did the scrap supply, resulting in compressed margins and further exacerbating the financial burdens on processors also coping with reduced volumes of recycled materials. For some perspective on this, ReMA research detailing the dollar value of material recycled for domestic and export markets revealed an eye-opening decline of 44 percent when comparing the first 10 months of 2009 with all of 2008.
Though most macroeconomic measures now point to recovery going forward, anxiety and uncertainty linger, especially as the U.S. unemployment rate passed 10 percent in October—the highest level since the early 1980s, when the jobless rate peaked at 10.8 percent. A Bloomberg News survey of economists in November found that most believe unemployment in the United States will exceed 10 percent through the first half of 2010, limiting a recovery in consumer spending and economic growth. The concept of a "jobless recovery" is not a new one. Employment also lagged GDP growth in the recessions of the early 1990s and 2000. That said, it's difficult to imagine a sustainable U.S. economic recovery in 2010 without vibrant consumer spending, which accounts for nearly two-thirds of total U.S. economic growth. And not only are more than one in 10 U.S. workers out of work, Americans reportedly now have more than triple the debt and less than half the savings they had in 1982.
Despite economists' concerns about the sustainability of future economic growth, 2010 strongly hints at a synchronized, but below-trend, recovery year for the international metal and recovered paper sectors. Demand from emerging markets, especially China, likely will lead the metals-intensive manufacturing component of industrial production. Many analysts maintain, in fact, that China alone will determine the fundamental picture and price performance of base metals and recovered fiber this year.
With this sober yet hopeful perspective on the U.S. and global economies, here's a look at some potential trends in 2010 for seven key commodities.
Aluminum
For the light metal, last year brought significant reductions in global primary production and equally significant reductions in apparent consumption and shipments. As visible inventories climbed, LME prices plunged from the highs reached in 2008. Prices recovered as the year progressed, exceeding $1 a pound by December despite the buildup of LME stocks. One forecast, by MF Global (New York), placed 2009 global aluminum demand down 14.5 percent from 2008.
After declining 12 percent in 2008, North American net aluminum shipments were running 23 percent lower as last year's fourth quarter began. Aluminum scrap demand also weakened, with U.S. scrap consumption shaping up to be about 7 percent lower than the 2008 total, which was itself down 10 percent from 2007. Similarly, U.S. aluminum scrap exports slipped last year, with shipments in the first nine months lagging 31 percent behind 2008 exports in the same period.
Despite aluminum's daunting supply and demand fundamentals last year, independent analysts expect higher demand and consumption in 2010, led by China, though they acknowledge that any upturn simply would reflect an overdue bounce from a depressed base. Record inventories, previously tied up in financing deals, will be released into the market in 2010, keeping new production and transacted prices in check. Consequently, price forecasts offered at the end of 2009 point to an LME cash average of 85 to 95 cents a pound this year, up from aluminum's 73-cent average in the first 11 months of 2009.
Copper
As confidence in the global economic recovery rose at the end of last year, analysts upped their forecasts for copper prices in 2010. As an example, the January 2009 Reuters survey of more than 50 commodity analysts offered a consensus estimate for cash copper of $1.96 a pound in 2010. Reuters' midyear survey, released in July, placed the consensus forecast closer to $2.03; and by October, with LME cash copper averaging $2.85 a pound that month, the updated Reuters survey offered an average of $2.95 a pound for 2010, with projections ranging from $2.50 to $3.40.
The principal drivers for optimism going forward include the expectation of sustained strength in Chinese copper consumption in 2010, global restocking of refined copper, relative tightness in copper scrap supplies, and currencyinspired speculative buying, which has some wondering whether a commodity asset bubble is artificially distorting copper prices (as well as the values for oil, gold, and other commodities).
Though currency and institutional investment buying remain important price influences, most analysts said they based their forecasts on global supply and demand fundamentals, which point to higher global copper use this year and limited spare new production capacity. Unlike aluminum, which could face another significant global surplus, copper is moving toward a more balanced market that could end in deficit by year's end as recovery picks up steam.
Iron and Steel
Though global steel consumption declined 8.6 percent in 2009, to 1.1 billion mt, it will increase 9.2 percent this year, to 1.2 billion mt, according to the World Steel Association (Brussels). China, which accounts for nearly half of global steel output and around 45 percent of world steel demand, is the key factor in all steel market projections. Worldsteel expects China's 2009 steel consumption will turn out to be 19 percent higher than its 2008 total, with its 2010 demand set to grow 5 percent.
In contrast, U.S. apparent steel consumption was heading for a 38.7- percent decline, to 60 million mt, in 2009 compared with 2008. That's on top of an 8.2-percent decrease in 2008. U.S. apparent steel use in the fourth quarter of 2009 alone was on pace to drop 45 percent year on year. According to Purchasing magazine's market basket of mill products, prices eased further in November and were down 35 percent for the year. Forecasts project a recovery this year, however, with demand placed at 72 million tons, or up 18.8 percent.
Though Goldman Sachs (New York) lowered its price expectations for the final months of 2009, it remains relatively bullish on 2010, believing that cost pressures and the benefits of an improving world economy will drive steel prices higher. The firm's November forecast calls for hot-rolled coil to average $580 a net ton in this year's second quarter, $553 in the third quarter, and $600 in the fourth quarter. For the full year, the company envisions an average of $575 a ton, with No.1 HMS averaging $247 a ton. World Steel Dynamics (Englewood Cliffs, N.Y.) also is forecasting a positive year for the global steel industries. It estimates raw steel output will reach 1.4 billion mt in 2010, up 17 percent from 2009, citing forces such as increased Chinese demand, inventory restocking outside of China, rising steel scrap prices, and the weak U.S. dollar. Assuming a "good times" scenario for 2010, WSD expects hot-rolled coil to average $590 a mt, with No. 1 HMS averaging $300 a mt.
Lead and Zinc
China's influence as a producer and consumer of zinc and lead cannot be understated, thus any market outlook and price forecast for zinc and its geologically connected sister, lead, must focus on that country. In the first three quarters of 2009, for example, China's combined zinc and lead metal production and consumption accounted for about 35 percent, respectively, of global output and demand. Beyond its own production, China also is a significant importer of refined zinc, lead concentrates, and refined lead.
Looking first at lead, the metal distinguished itself by leading the LME base metals complex in 2009, with its spot price up more than 145 percent in the first 11 months, prompting some to claim that lead has had a "good recession." LME cash lead averaged 76 cents a pound in the January-November period, reaching a peak around $1.13 late in the third quarter.
As for lead's fundamental picture, the International Lead and Zinc Study Group (Lisbon) placed the metal's global surplus at 62,000 mt in the first three quarters of 2009, with most analysts assuming a lower number by year's end thanks to China's closure of some lead smelters for health and safety reasons. Most independent sources expect to see a much larger surplus this year, however, as global supply, paced by Chinese production, exceeds global consumption. According to CRU (London), China is sitting on some 300,000 mt of refined lead. Thus, even assuming lower-than expected availability of lead concentrate and lower refined output, most price forecasts anticipate only a modestly higher average this year—around $1 a pound—compared with 2009.
The zinc market is showing several similarities to lead. It faces statistical surpluses of about 336,000 mt in 2009 and 227,000 mt in 2010, ILZSG reported in November. As with lead, higher average zinc prices have prompted producers to restart idled production, though 2010 demand may not keep pace, despite encouraging signs in the automotive and construction markets. And, like lead, zinc faces questions regarding the amount of unreported stocks in China. Consequently, most 2010 price forecasts place zinc's average around 95 cents a pound, which would be a considerable improvement over its 72-cent average through November.
Nickel and Stainless Steel
Though nickel prices rebounded strongly from the lows of December 2008, the market experienced a downward correction from the highs reached last August. Market watchers attributed the fall-off to investment fund liquidation and lower Chinese buying due to lower fourth quarter stainless steel production. According to Macquarie Research (London), global stainless steel production was on track to total 25.1 million mt last year, down 5.4 percent from 2008, though China's stainless output rose an estimated 28 percent. Macquarie's forecasts see U.S. stainless production totaling 1.7 million mt last year, a decline of 13.5 percent from 2008. MEPS International (Sheffield, England) places the U.S. decline at 9.2 percent, a 27-year low, while EU stainless production touched a 15-year low.
As the global stainless steel market contracted, primary nickel inventories escalated, with LME stocks swelling almost 80 percent through November, reaching levels last seen in early 2005 and keeping downward pressure on prices. These inventories rose despite a six-month strike at Vale Inco's nickel operation in Sudbury, Ontario.
Entering 2010, global fundamentals suggest a slow, measured recovery for both primary nickel and stainless steel, its principal end-use market. Even with relatively bullish assumptions regarding stainless steel production in 2010, most forecasters expect an even greater statistical nickel surplus this year and offer conservative price projections despite nickel's volatile price history. The industry also will most likely continue to face tightness in stainless steel scrap supplies this year.
As last year wound down, some analysts scaled back their nickel price forecasts for 2010, with Goldman Sachs JBWere (London) lowering its projection to $7.60 a pound and others envisioning a trading range of $6 to $7.71. In contrast, Barclays Capital was on the bullish side with its November forecast, calling for LME cash to average $9.75 a pound this year. Reuters' October consensus survey also was optimistic, offering a mean forecast of $8.39. Despite these differences of opinion, virtually all forecasts point to a 2010 average modestly above 2009 but well below nickel's 2008 LME cash average of $9.54 a pound.
Paper and Recovered Fiber
The near-term fundamental picture for the domestic paper and paperboard industries appears to be anything but positive. In 2008, total output of these major products declined 4.9 percent, to 88.4 million net tons, the lowest production in 15 years, according to the American Forest & Paper Association (Washington, D.C.). This negative trend continued through 2009, with Pulp & Paper Week expecting U.S. output to reach 76.5 million net tons. If correct, that would be the lowest production since 1988. Exports of paper and paperboard showed strength, however, as the dollar faltered.
As the paper and paperboard markets suffered last year, raw material costs trended higher, placing more financial burdens on North American producers. Virgin pulp prices, as measured by northern bleached softwood kraft, increased in eight consecutive months, holding at $830 a mt as the year ended. Analysts see this upward trend continuing in early 2010 because pulp inventories remain close to record lows. The pulp situation could moderate as the year progresses, however, if paper and paperboard markets remain weak and if supplies of softwood and hardwood pulp increase.
Recovered fiber prices also trended higher in 2009, thanks primarily to steady export demand. Though scrap paper tags more than tripled from their January lows, they were on track to be well below the 2008 average of $104.72 a ton, as measured by ReMA's recovered fiber index.
As for 2010, analysts agree that positive global economic activity—especially in China—will dictate the direction of the paper, paperboard, and recovered fiber markets. The first half of 2010 could see a squeeze on Chinese papermakers' margins due to rising costs, stagnant paper prices, and relatively low pulp inventories. At the same time, the growing economic recovery could boost mill production and kick-start demand as well as idled pulp capacity, in turn moderating NBSK prices and bolstering recovered fiber values. Even if that occurs, it's questionable whether ReMA's 2010 fiber index can match the price level recorded in 2008. •
Robert J. Garino is director of commodities for ISRI.
At this time last year, the U.S. economy was practically roadkill, part of a multitrillion-dollar global recession. Signs of renewed life began to emerge in the third quarter, and most analysts now expect global market confidence to return —slowly but surely—in 2010.