By Bruce Shapiro

 

USMCA and Phase 1 of the tariffs have passed, which should lead to reduced trade conflicts and tariffs. China has agreed to buy $200bn in products from the US. However, $360bn in tariffs still exist, which amounts to about a 15pc tariff on many Chinese imports.

 

U.S. consumers will mainly pay for that. 

 

The Chinese trade deficit fell last year, but it ended up at the same level as before the trade war started. The agreement will improve protection for some intellectual property, but most intellectual property issues remain unresolved. Of the $200bn China has agreed to buy, $50bn is in manufactured goods and is supposed to take place over the next two years. The details of these purchases are unknown. While the tariffs have helped the US steel and aluminum industry, they have hurt manufacturing. The net effect has been higher raw material costs and lower exports. The overseas supply chain has been disrupted and virtually no manufacturing has returned to the US. It has mainly moved from China to other Asian countries. 

 

There is hope that reduced trade conflicts and uncertainty will prompt an increase in business investment. However, we are in an election year. Even though no first-term president has lost a re-election bid in a good economy, many businesses will wait to see who is elected this year.

 

New orders for nondefense capital goods, excluding aircraft, fell in December by 0.9pc, and durable goods, excluding aircraft, also fell slightly. In January, car sales fell, and the 2020 forecast predicts a 3-5pc dip. Home sales have been good for the last six months with low interest rates and not as much supply. Average home prices are 15pc higher than they were before the Great Recession.

 

The ISM manufacturing report for January brought surprisingly good news with a 3.1pc increase to 50.9, meaning manufacturing is now in expansion. There were sharp increases in new orders, the production index, new export orders, and imports. The order backlog is still in a nine-month contraction, but it happened at a slower rate. Miscellaneous manufacturing and fabricated metal products experienced growth, and the material handling industry business activity index rose 10pc in January. There were sharp increases in new orders, shipments, unfilled orders, inventories, expected future orders, and even exports, although exports are still in contraction. The Chinese Caixin remains in expansion while the Eurozone continues its contraction; the sum of those two parts, plus the US ISM, puts the total at a break-even point.

 

With all that great news, guess what the Shapiro Nonferrous Scrap Index did? It was down 10pc this January vs January 2019. There were the same number of days in both months and no anomalies. Of our top 50 accounts, 68pc produced less metal, 16pc were up, and 16pc were even. Certainly, the Boeing shutdown on the Max 737 hurt many of you. But there were also slowdowns in HVAC, ship and boat building, housing, transportation, and automotive sectors. Our theory is that the year-end holidays fell during the middle of the week and maybe plants took off more time than in 2019. We will see how February goes.

 

Unfortunately, the “black swan” coronavirus has struck China and is affecting the rest of the world. The death toll has topped 1,000, and the number of people infected keeps getting higher. While this is very serious, keep in mind that the flu kills 12,000 people annually in the US. We hope the steps being taken will reduce this deadly, serious virus and a cure will be found soon. The effect on China’s economy is forecast to drop in growth from 6pc to between 4.5pc and 5pc. China now represents 17pc of the world’s economy, as opposed to 4pc in 2003 when the SARS virus occurred. The Chinese factory shutdowns are disrupting the entire worldwide supply chain.

 

February metal prices have been all over the board. Most of the prime metals we follow have fallen sharply with the coronavirus outbreak. Aluminum, copper, nickel, and iron reacted quickly. While prime aluminum dropped close to 5¢/lb, prime scrap held steady with better demand. Secondary aluminum also picked up a bit with an increase in export demand, due to the lower steel prices in Q4 bringing less scrap to the shredders. Stainless steel prices are the scrap anomaly. They rose despite lower nickel and steel prices. Scrap steel prices dropped $30/t in the Alabama market and $10/t in the Chicago market.

 

Most of the forecasters I follow are calling for an end to the global manufacturing recession in the second half of this year. The best economic and metals analyst I know is Edward Meir from ED&F Man. For 2020, he predicts that LME aluminum will average $1,780/t, with a high of $1,950 and a low slightly above $1,600; copper will average $2.76/lb, with a high of $2.97 and a low of $2.50; and nickel will average $6.30/lb, with a $7.50 high and a $5.12 low.

 

No act of kindness, no matter how small, is ever wasted. –Aesop

 

Work safe. Work smart. Profits will follow.

 

Bruce Shapiro is President, Shapiro Metals. 

 

This article first appeared in the Shapiro Metals Market Insights page on LinkedIn.

 

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