How Long Will the Metals Bull Market Last?
In the July/August 2020 issue of Inside Supply Management®, MetalMiner speculated that manufacturing organizations would likely face steel price spikes and shortages during the second half of 2020. That — and more — has occurred.
U.S. demand continues to come back, and manufacturing organizations of all sizes and industries are dealing with shortages of key materials and rising prices for most metals. The proverbial bullwhip effect — combined with weather-related supply disruptions, coronavirus (COVID-19) pandemic-related shutdowns, container shortages and the like — has created angst, not to mention disruption, for many manufacturers.
In a recent MetalMiner web poll, when asked which metal had most “blown your 2021 budget,” carbon steel (43 percent) ranked first, followed by stainless steel (27 percent) and aluminum (nearly 20 percent). More than 63 percent of respondents said they had seen price increases.
Our last article suggested markets would be more volatile than before the pandemic. That, too, has occurred.
A Supercycle for Some Commodities?
Several metals saw double-digit percentage price increases, though they had to withstand single-digit declines along the way. Some banks have signaled the start of a new commodity supercycle, but MetalMiner is not as certain.
First, China will not maintain its demand-fueling loose credit forever. Second, the dollar has recently risen and tends to trade inversely to commodities — for example, a rising dollar typically means lower commodity prices. Furthermore, oil prices will likely remain range bound.
Despite macroeconomic drivers suggesting that metals prices and commodities may not see a commodity supercycle, buying organizations could continue to feel the supply squeeze. Metals with the strongest fundamentals — meaning supply and demand — will retain better price support. Of the non-ferrous metals, aluminum, copper and tin have strong fundamentals. Currently, nickel, lead and zinc look a bit weaker.
Despite the nickel weakness, U.S. stainless buyers will continue to experience pain from limited supply and continuous price increases from mills and service centers. Also, a potential supply squeeze emerged at press time, as about 1,300 United Steelworkers union members at Pittsburgh-based Allegheny Technologies Inc. (ATI) went on strike. Since ATI had already announced it would exit the commodity side of the market, stainless buyers will continue to struggle to find available supply.
Carbon steel buyers have already experienced significant material shortages. But the second half of 2021 could look different from the first.
Strategies to Combat Price Volatility
The main factor impacting steel markets involves the speed and volume of capacity scheduled to return later this year. The arrival of Steel Dynamics’ new facility in Sinton, Texas, and Nucor’s mill in Gallatin County, Kentucky, will help shore up supply, particularly as Osceola, Arkansas-based Big River Steel continues to ramp up production.
Strategies to mitigate price volatility, including (1) communicating demand forecasts regularly with service centers, (2) using scrap indexes for steel instead of finished price indexes and (3) splitting out value-add from metal cost.
Buying organizations will save their companies money by doing their homework to add up all price increases incurred since the start of last summer’s upturn. Suppliers will not inform customers that prices have dropped. By carefully monitoring prices at least biweekly, buying organizations can capture price declines as markets drop.
U.S. retail sales growth rates, excluding automotive and gasoline, increased 26.3 percent year-over-year in March, according to Mastercard’s SpendingPulse report. Online sales grew 56.8 percent compared to March 2020. At the 12-month mark since the first coronavirus (COVID-19) lockdowns, retail sales in March were boosted by the infusion of stimulus payments and broader business reopenings across the country. Year-over-year sales increased dramatically as the month progressed, with a 1.6-percent increase over the first half of March and a 46.9-percent surge over the second half. The unique retail situation of March 2020 is evident in year-over-year comparison for some sectors. For example, apparel and jewelry spend dipped at the start of the pandemic; that sector had elevated growth rates this March. Essential sectors faced the opposite scenario: Grocery sales surged last year as consumers stocked up but contracted year-over-year this March. However, March 2021 grocery sales were up 7.5 percent when compared to March 2019.
Brazil is forecast to produce an all-time high soybean volume of 141 million metric tons (MT) in the marketing year from February 2022 to January 2023 over a record 40 million hectares of fields, according to an April report by the U.S. Department of Agriculture’s Foreign Agricultural Service (FAS). The expansion is based on current market conditions, including strong demand, high prices and a favorable exchange rate, FAS indicated. Brazil is the leading producer and exporter of soybeans, accounting for more than one-third of the world’s soybean production. Despite a slow start — Brazil’s foreign trade department reported soybean exports in January and February were less than half compared to the first two months of 2020 — the country’s soybean exports in the 2021-22 marketing year are forecast at 87 million MT, a year-over-year increase of 2 million MT, according to FAS.
Germany has signed an agreement with Canada to cooperate on green-energy innovation and trade as both countries attempt to reach net-zero emissions by 2050. Under a memorandum of understanding, the two nations will collaborate on clean-energy transition, including developing policies and regulations and integrating large shares of renewables into electricity systems. The two countries will explore joint development of “green hydrogen” from Canadian hydroelectric power for export to Germany. A zero-carbon fuel made by electrolysis, green hydrogen uses renewable power from wind and solar to split water into hydrogen and oxygen. Germany wants to scale up hydrogen as an alternative to fossil fuels; however, it lacks the land resources to produce enough green power for the green-hydrogen electrolysis process. Deputy ministers from both countries were scheduled to meet in May to work out agreement details and draft a development schedule.
Food prices helped power Nigerian inflation to a four-year peak of 17.33 percent in February, the country’s National Bureau of Statistics (NBS) indicated. In double digits for four years, inflation in the country has been exacerbated by the coronavirus (COVID-19) pandemic leading to a drop in the price of oil, Nigeria’s main export, which has weakened the naira currency. With 30.6 million Nigerians unemployed, there are concerns that rising joblessness, higher prices and low economic growth could trigger more social unrest in a country that has been recently plagued by it. “Straining households will be compounded by increasing reports of insecurity in some regions, fueling the risk of broader social discontent,” Jacques Nel, head of macroeconomic research at NKC African Economics in South Africa, told Reuters. Food prices rose 21.79 percent in February, and such staples as bread, cereals, potatoes, fruits and oil drove the increases.
February was the 12th consecutive month of falling year-over-year employment in South Korea, as the coronavirus (COVID-19) pandemic helped precipitate the country’s worst jobs crisis in nearly a quarter century. The number of those employed above age 15 was 26.3 million in February, a decrease of 473,000 compared to March 2020, according to Statistics Korea. “The employment situation is worsening for youngsters and young adults. As the polarization of employment leads to (inequality) of income, the government should be strictly aware of the employment situation and immediately take emergency measures,” President Moon Jae-in said at a press conference. A January employment drop of 980,000 was the largest since a 1.28-million decline in December 1998. The pandemic hit the services industry hard: Jobs in the lodging and eatery and the wholesale and retail sectors dived 232,000 and 194,000 year-over-year, respectively, in February.