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

Happy New Year 

We will continue to face a lot of problems in 2022. Even with over 70pc of the US now vaccinated, COVID-19 deaths shockingly have doubled this year to over 800,000,  and the reported Omicron cases are over 600,000 per day. Unfortunately, COVID-19 variants look like they will be with us for a long time. Supply chain issues aren’t going away anytime soon, either. Inflation worries and political madness continue. Chip shortages along with finding skilled and unskilled labor is still difficult. Political turmoil in Russia and China will also affect us. 


The good news is we are resilient, and the economy is healthy. After the central bank’s recent meeting, Federal Reserve Chair Jerome Powell mentioned the positive effects – strong growth and demand – of adding over $5trn to the economy. “People will judge in 25 years whether we overdid it or not,” he said. I certainly don’t have anywhere near that kind of time to wait to judge the actions.


According to Neil Irwin of the New York Times, “The goal [of the Fed] is to achieve something of a Goldilocks level for the economy by late 2022. In projections released this month [December], for example, the median Fed leader expected an unemployment rate of a mere 3.5 percent and 2.6 percent inflation in the final months of 2022, with a strong labor market and gradually receding inflation continuing through 2024.” This will be a very difficult challenge and we can all hope the Fed is correct. 



I prefer dealing with inflation instead of the recession that we faced in Q2 2020. We will be discussing inflation for a long time. 


  • CPI inflation is running annually at 6.8pc. 
  • Personal consumption expenditures (PCE), excluding volatile food and energy expenses, is 4.7pc.   
  • Wages climbed by 4.3pc annually and at a 6pc rate in Q3. And, many US companies will be setting aside nearly 4pc of their total payroll costs for additional wage increases in 2022. The wage-price spiral is a major reason the Fed shifted to tighter monetary policies on a faster basis.


The psychology of inflation is interesting. The CPI reflects the volatile food and energy sectors, which impact most people on a daily basis and deliver a shock factor to lower-wage earners, retired people, and those on a fixed income. The larger inflation drivers — housing, cars, major appliances, and furniture — have gone up at a much faster rate. This has been a case of “too much demand chasing too little supply.”


Mostly, consumers are postponing many durable goods purchases because they believe the prices are temporary and will decrease as supply chain issues keep improving. Eventually, durable goods prices will decline and inflation will reduce. It may take at least a year or two to come back down to a more normal level, but there is no expectation to buy today because goods will cost more in the future. That expectation would prompt higher inflation, and that would be a big problem. The correction for high inflation is to slow the economy down. Ouch!


In 1981, after Ronald Reagan had been in office for 11 months, inflation was 8.9pc, unemployment was 8.5pc and rising, and consumer confidence indexes were terrible. Three years later, the jobless rate was 7.2pc and falling, and inflation was down to 4.2pc. And then Ronald Reagan was re-elected as President! The times and expectations have certainly changed.  


Employment and COVID-19 

The unemployment rate is now 3.9pc and about what it was pre-pandemic. Non-farm payrolls increased by 199,000 in December, and these numbers are usually revised upward. Civilian employment, an alternative measure of jobs that includes small-business start-ups, increased by 651,000 in December. That’s another big positive. According to Brian Wesbury of First Trust Advisors, “Combining hourly pay and the number of hours worked, total worker pay (excluding irregular bonuses) has increased 9.9pc in the past year and is up 8.5pc since February 2020 (pre-COVID). This is important for two reasons: First, it means the growth in total worker pay has roughly kept pace with inflation; second, it means total worker pay is now roughly back to the pre-COVID trend (where it would be if COVID had never happened).” The problem is that are still five million fewer people working now than then, and most workers will still complain about inflation!


The COVID-19 Omicron variant has proven to be highly contagious but less deadly for those who have been vaccinated. Well over 99pc of the people dying from COVID-19 have not been vaccinated. Scientists and Doctors are saying that this Omicron wave will be peaking in the very near future. At some point, it will become an endemic disease like the “old” flu. The typical flu season would kill 30,000 people per year, mainly the elderly. Hopefully, more medications will also be developed to reduce the effects of this disease.  


In the manufacturing world, we can live with the problems as long as demand is good and our economy is strong. According to the Bank of England, the US accounts for almost 90pc of the roughly 22pc surge in world demand for durable goods since the end of 2019. Our economy is estimated to have grown 6pc in 2021 and a projected 4pc in 2022, substantially greater than it has been in a long time.


Because of what we have learned about the supply chain in the last two years, manufacturers’ just-in-time strategies are shifting from Asian suppliers to closer and more dependable domestic and Mexican suppliers. This strategy is attracting significant foreign investments in US manufacturing locations and is a less risky bet than relying on China. In addition, the $1.7trn infrastructure spending bill will bring future supply chain and manufacturing benefits.


Non-defense capital goods new orders excluding aircraft were down slightly in November but still positive. ITR forecasts, “Corporate coffers are flush with cash, interest rates are low, labor is expensive and scarce, and demand exceeds supply across a range of industries – grounds are fertile for further New Orders ascent.”     


The PMI was down slightly in December but still strong. The supplier delivery index was the lowest it has been in over a year. There are still long delivery delays and shortages, however, prices are starting to fall — although they are still high. The Shapiro Nonferrous Scrap Activity Index for December was flat compared to November, and it had been all year. In 2021, the industries from which we buy across our 10 locations – auto, aero, HVAC, trailers, RV, medical devices, shipbuilders, and foodservice equipment manufacturers – showed an average monthly variation of plus or minus 5pc.    


China Issues 

China highly influences metals markets because it produces and uses nearly 50pc of the world’s aluminum, copper, nickel, and steel. Their official PMI manufacturing index was up slightly in December, and the Caixin manufacturing index went from 49.9 to 50.9, ending a period of contraction.  

Real estate represents around 30pc of the Chinese economy, nearly twice the levels that led to the financial crisis of 2008-09 in the U.S., Spain, and England. According to Thomas Duesterberg of the Wall Street Journal, real estate drives China’s annual growth above 6pc, but a debt bubble inflated it by 20pc from 2014-2018. 


“Originally intended to accommodate rapid urbanization for the industrial economy, the urban property market is now overbuilt. Some 90pc of urban households own their own properties and enough vacant units are available to accommodate 10 years of urban immigrants. Sales and prices have tumbled this year, and overleveraged builders and creditors are suffering the consequences,” he said. Yikes! So far, the Chinese government has not come to the rescue of the real estate industry. If there is a hard landing, metal prices would be affected. The recent government focus has been on COVID-19 and zero-tolerance lockdowns in cities where it is evident. We will see how long this current shift away from full employment and prosperity lasts.  



What an insane year. Last year at this time I said that 2020 was an insane year. Edward Meir’s 2020 forecast was within 3pc of the actual prices. Amazing. For 2021, his yearly price average forecast for LME-traded metals was $1,880/mt for aluminum, $7,330/mt for copper, and $17,100/mt for nickel. 


Other forecasters I follow for aluminum predicted a yearly average low of $1,878/mt and a high of $2,080/mt in 2021. Whoops. It takes a lot of chutzpah to make these forecasts. [Chutzpah is a Yiddish word. My favorite definition of chutzpah is from a trial of a son who has been convicted of murdering his mother and father. He pleads for mercy from the court on the grounds that he is an orphan.]


In 2021, PMTA and prime aluminum scrap rose about 57pc, as did copper. Nickel was up 36pc, 304 stainless was up 67pc, and scrap steel bush prices were up 88pc! No sane person would have made those predictions. Jeff Curry from Goldman Sachs has been forecasting a metals super-cycle and one that will continue for years. Based on 2021, it sure looks like he is right so far. I certainly don’t have the chutzpah to make the bet that it will continue.


Aluminum continues to be strong. Energy prices are reducing supplies in Europe. The Chinese market also looks strong while their inventories fall and energy curtailments ahead of the Olympics are causing some production slowdowns. 


The Midwest premium is now over 30¢/lb  again after the weak December demand reduction. Prime aluminum scrap, especially 5000 and 6000 series scrap, has risen sharply because of the very high price of magnesium and silicon additives. The prime segs average price at the start of this month is the highest in its history. Secondary aluminum is flat. Copper and stainless steel are also strong. Only steel will be down this month.


The 2022 metals forecasts will be out later this month and I will be happy to pass them along to you. I am sorry about the length of this Market Insights, but I learned a lot and wanted to share the information with you. I hope it helps with your planning.  

Three Rules of Work:
1. Out of clutter, find simplicity.
2. From discord, find harmony.
3. In the middle of difficulty lies opportunity.

-Albert Einstein  [Easy if you’re Einstein. I would love to have seen his forecast!] 

Life is good. Family and health are precious. 

Bruce Shapiro 

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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