Davis Index: Market Intelligence for the Global Metals and Recycled Materials Markets

Last year in Q2, there were many forecasts for a Q3 V-shaped recovery. It has taken an extra nine months for this baby to arrive, but we are in a strong recovery now. It is being fueled by $6tn in savings, of which $5tn was funded by the government rescue programs. 


Close to 50pc of the population has been vaccinated, and COVID-19 cases and deaths are dropping rapidly. With the start of summer and most people wanting to get outside, it is no wonder that people are feeling good. The entertainment and travel sectors are rapidly gaining momentum. All of these factors will energize the economy for years.

The downside may or may not be inflation, or as I call it, the “I word.” We will be bombarded with news about inflation when the next report comes out. These numbers will be based on the very low and ugly Q2 2020 panic prices. The PCI will be up more than expected and “look” bad. Part of that inflation includes the price of used cars going up due to the car shortage and air travel costs making up for the pandemic’s lack of demand over the last year. 


The Fed is focusing on personal consumption expenditures (PCE), which eliminates some of the transitory price issues. The high unemployment rate is another anomaly. There are seven million fewer people working now than pre-pandemic. Businesses are having trouble hiring not only fast-food restaurant workers but also manufacturing and middle-management employees. As more people are vaccinated and we get into September, when children go back to school and supplemental benefits run out, more people will be joining the workforce. These will be higher-paying jobs and the people getting them will be spending that money. Moreover, we still have that excess $6tn in savings that will be fueling this economy. 

I believe the transitory spikes in prices will cause some inflation and get us to 2pc or more by the end of the year. One of the core reasons for inflation in the 1970s was the inflation psychology that caused consumers to buy goods and durable goods because the prices would be higher tomorrow. Consumers were outraged when the price of gas “skyrocketed” from 36¢/gallon in 1970 to 75¢/gallon in 1978. Eventually, inflation was brought under control with 20pc interest rates and a horrible recession. 


“We aren’t obviously on the way to a very high and persistent inflation outcome,” said Brian Sack, director of global economics at the hedge fund D.E. Shaw and a former senior Federal Reserve official, in an article in The New York Times. “But we’re at an inflection point, in that the rise in inflation expectations to date has been a policy success, but a rise from here could become a policy problem.

The manufacturing world continues to look great now and into 2023. Nondefense capital goods new orders, excluding aircraft, were up 2.3pc in April. Business and consumer confidence is positive. ISM was strong again in May. Gains were broad-based, with 16 of 18 industries reporting growth. The new orders index jumped to 67 and new export orders notched some gain as well. 


Durable goods were slower due to the same production issues with disrupted supply chains, rapidly rising costs for inputs, shortages of raw materials across the board, and employers having trouble filling open positions. These issues have all come together to prevent production from rising quickly enough to meet the explosion of demand as the US economy reopens. The good news is that manufacturing activity should remain robust for the foreseeable future to clear this order backlog. The May Shapiro Nonferrous Scrap Activity Index was up 5pc from April. A lot of variations continue to show up in these volumes, even in similar sectors.  

The Chinese PMI has been just above 50 for months. Exports have been strong and the domestic market just average. The spike in metal prices —the highest prices in history for many metals – has caused the government to threaten companies not to raise and collude on prices. Some metal prices did go down when they made this announcement in mid-May. But now many have recovered and are still near highs. 


Trying to control metal prices and commodities is nearly impossible. Some of the increase in prices may have been due to inventories growing in recent months with continuous upward prices. As I said last month, “correction happens.” I feel good about that analogy as Elon Musk just tweeted this about the chip shortage: “Fear of running out is causing every company to overorder – like the toilet paper shortage, but at an epic scale.” He added it shouldn’t be a long-term problem. 


Some Chinese companies will take the threats to heart and reduce their high inventories, but I don’t think it will materially affect the prices. The other issue with trying to control prices is supply and demand. With the worldwide economies growing and expanding, I don’t see the Chinese policy succeeding.  

Prime aluminum got to a high of $1.45/lb before falling to a low of $1.33/lb. It was $1.38/lb on Jun 1. The Midwest premium is 27¢/lb. In general, demand for prime scrap remains strong, although June prices are spotty with some up a little and some down. Secondary grades fell for the first time in a year. Auto demand is slower with the chip shortage and other parts shortages. 


The Japanese plant that is a major supplier of auto chips and had a fire last year is coming back online and should be at full capacity by mid-June. GM just announced the re-start of more plants. Other automakers should follow suit. Copper and nickel are higher now and had the same early May spike followed by lower prices and recovery. They all finished higher than last month. 


Ferrous prices are bat shit crazy. A year ago, iron ore prices we close to $50/t. They just reached $230/t. HRC is over 80¢/lb. The US steel mills are running at a high of 80pc capacity. That’s great news if you are a steel mill but bad news for manufacturers. The Chinese HRC price is 35¢/lb, which gives them a very strong competitive advantage. The Coalition of American Metal Manufacturers and Users has been attempting to get Section 232 tariffs reduced. We do need a strong steel industry, but something is not right.  

“Education is not the learning of facts, but the training of the mind to think.”  -Albert Einstein

Life is good. Family and health are precious. We have lots to be grateful for.


This report was prepared by Bruce Shapiro and reflects his current opinion of the economy. It is based on sources and data he believes to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice.

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