Metal Prices Are Surging Again

After hitting record highs in mid-2008, commodity metal prices hit the skids as customers quit buying. But prices are climbing again. U.S. Steel (X), for instance, has hiked prices three times since June 1, while Alcoa (AA) has helped push up aluminum prices 6% since the first quarter. Also higher are copper and nickel.

What on earth is going on? The global recession is still crushing metal-consuming industries, such as automotive, aircraft, capital equipment, and construction. General Motors, for instance, emerged from Chapter 11 bankruptcy on July 10 as a shadow of its former self, while Boeing (BA) is losing aircraft orders as airlines scale back operations.

But demand is growing in such big emerging markets as China and India. Perhaps more important, inventories have been greatly reduced because metal producers quickly lowered output by idling mills and smelters.

What's uncertain is how long prices will keep moving up. Michelle Applebaum, an independent steel analyst in Chicago, forecasts that steel prices will continue to increase. She notes that prices of scrap steel, a key ingredient in new steel, surged as much as 46% in June.

Automakers in a steel price trap?

But George Gero, vice-president of global futures at RBC Capital Markets in New York, says that automotive production is too weak to support even today's higher prices. China's consumption might slow, too, say such analysts as Shawn Hackett of Hackett Financial Advisors in Boynton Beach, Fla.

Even if this summer's price increases get rolled back partially, they can't help but hurt carmakers. With joblessness in the U.S. at 9.5%, consumers aren't likely to hurry into showrooms to pay more for vehicles. Indeed, U.S. new car sales are on track to fall to 9.5 million units from 16.5 million in 2006.

Referring to GM's surprisingly swift reorganization, Gero says, "What people don't realize is that just because a quick bankruptcy comes out today, [it] doesn't mean they're going to place orders tomorrow. Not only do you have anemic demand, but unfortunately, the recovery is coming at a glacial pace."

Profits Are Lagging

The turnaround in world metal markets hasn't translated into profits for metal makers. Alcoa reported on July 8, for example, that it lost $317 million in the second quarter as revenue plummeted 41% from a year earlier, to $4.24 billion. It was the Pittsburgh company's third quarterly loss in a row.

While they've been raising prices, steelmakers have not been upping production. Steel giant ArcelorMittal (MT) is still operating at only 50% of capacity, on average. That restraint could keep inventories from rising, however, and thereby support prices.

And while metal consumers might groan, their purchasing agents are still much better off than they were last year. The price of shredded scrap steel hit almost $600 a ton last summer. Today—even after rising 29% in June—it averages $265 a ton.

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