2023 Outlook
Hello everyone, Dan Sahd of Sahd Metal Recycling. At the end of 2021 we thought we had just gotten off a roller coaster ride, but in the metals market we had no idea what 2022 had in store for us!
The supply chain mess of 2021 filtered into 2022. Constant backlogs, labor market conditions and material shortages kept pricing elevated in the early part of 2022. The war in Ukraine has lasted much longer than many in the West who don’t have the perspective of intense rivalries of the East ever expected. We hit highs across the metals complex and as we worked through these inventory situations and artificial highs everything came down dramatically.
Sometimes we are too much in the day to day to keep the long perspective. Often I can’t even remember where we started the year and looking back is very interesting.
Taking a look at the trends of 2022 we can see this play out by commodity. Taking a quick look at steel, #1 Philadelphia busheling started at $505 a ton, peaked over $700 and should end right around $350, 50% off the peak and 30% from the beginning of the year. This dramatic turn can in part be pegged to the automotive industry and the quest for semiconductors and missing parts that plagued the industry through various shut downs and is probably a reason why this end of the steel industry was more volatile than others. HMS #1 tracked but with much less volatility–starting the year at $395 a ton, probably finishing at $320 when December breaks with the year peak slightly over $500. In our market the weakness of export, often related to the US Dollar strength has hurt pricing domestically.
Copper started the year at $4.36, peaked near $5 and is now right in the $3.80 range. If you look at the copper track it almost identically tracks the US Dollar index peak for valley. Take a look at this chart–the index started the year at 96 peaked at 115 and is now right around 105. Each copper peak has a corresponding dollar drop. China should continue to be the player here dictating terms in 2023.
Aluminum started the year a bit above $2600 a ton, and rose dramatically near $4000 and is now near $2500 on the LME. Ukraine war impacted this metal the most because of the unknown of russian sanctions related to the war and its impact on aluminum supply. The Midwest Premium has traded between .19 and .40 this year! That’s a huge swing! Now we are at the lower end. 2023 seems pretty bullish with some new extruders ramping up and some secondary looking a bit stronger.
Nickel was a mess overall and really not even a true market for various points of time. Probably the one commodity that was the most surprising and manipulated. Short squeezes, canceled trades and so many other factors put this sleeping giant in the spotlight. Starting the year at $20,000 a ton and ending at $29,000 a ton doesn’t tell the story of the peak near $50,000 which makes the 2007 nickel anomaly look like child’s play. The market was canceled for multiple weeks in March and there was no benchmark to even consider. Climbing back out of that here we are but buying markets in scrap don’t come close to reflecting where nickel is being traded.
As I said earlier, just reviewing where we have been and the range we’ve operated in this year is a lesson in itself! As always the supply and demand dynamics are only a small part of the story with the metals complex. I can’t help but believe that like last year the three biggest factors will be:
- FED
- US Dollar Strength
- Potential ESG backlash or support
This chart on the Fed Funds rate in the past year and over the long run tells the story of the environment we are going into. When you stretch it out there is really no precedent short of the 1980s Volker regime where interest rates have risen so sharply, it’s there in the graph. At the same time the Manufacturing ISM reflected the first month of contraction last month since the beginning of the pandemic. These factors are causes and effects of what is almost inevitable to be a slowdown in the beginning of 2023. There is no way we can match the run of 2022 with this dramatic change in the background that is constricting business activity. This is the goal and there is no ability to stop until it is reached.
Inevitably this will be the biggest impact. Sure, a rebound in China with a COVID opening (can you believe we are still questioning this?) could be the biggest positive impact on pricing it is unlikely to be able to put a dent into the overall Fed backdrop.
Here’s hoping we see the beginning or first and second quarter 2023 as the low points of the year. At some point the Fed will stop and have to get a market understanding of the level we are dealing with. Markets hate jolts and uncertainty and we’ve had an abundance of both.
Hand in hand with this is currency, especially in heavy traded international markets. With a USD index range from 96-115 the weaker the dollar the stronger the year, it’s just that simple.
Finally what is the ESG/EV and general metals of the future shortage impact? Certain metals, definitely nickel and also copper and aluminum to a lesser extent have been propped up by this. Vertical integration abounds as EV makers are directly buying companies to buy supply. If the shift in public perception in a downturn turns against these initiatives it could be some big downside pressure we aren’t currently banking on.
