The big story of the new year continues to be the run-up of the regional Midwest premium (MWP). As January comes to an end, the MWP sits just over $0.30/lb, or almost 50% higher than December’s price. A return of market activity in general has pushed the premium back up closer to replacement cost levels. Higher-than-historical average freight rates and higher interest rates put replacement level in the high 20s, which the premium has now shot past.
The quick pace has concerned a lot of market participants looking for more understanding. One key factor that was here even before the pandemic was the tight US market with low stocks at London Metal Exchange warehouses. This tends to make the market much more volatile as it reacts more to shifts in supply-demand fundamentals and future outlooks quicker. Also, it tends to overshoot on both the upside and downside. This can be seen not only in the past few years, but even these last few months where a combination of sentiment and market activity have given the premium three $0.08/lb+ shifts over the course of the past year.
US Economic News Continues Slightly Positive Outlook
Economic news in the US was teetering on the edge of positivity again in December. GDP rose 2.9%, which was above expectations, and inflation slowed for the sixth month in a row. While consumer spending grew in Q4, it fell in December, a sign that interest rate hikes by the Federal Reserve are starting to take effect. Another positive is an increase in the savings rate, which shot up during the pandemic but was at historically low levels through mid-2022.
The largest effects have been in the housing market. The cost of buying a home is up significantly due to high sticker prices for houses combining with the higher mortgage rates. As such, pending new home sales declined for over a year on a month-over-month (m/m) basis. That is, until this December. While this has sparked some to hope for a recovery, others have remained pessimistic. Goldman Sachs, as perhaps the most prominent example, made claims that as many as four different US cities could see 2008 style housing collapses. While, inevitably, the true path of the market will lie somewhere in between collapse and full-on recovery, there are many question marks that add to uncertainty in demand for 2023.
This is of particular concern for extruders, where a large chunk of demand comes from new windows and doors. Throughout mid to late 2022, there was hope that multi-family construction could help buoy demand. While housing supply was short, many would-be buyers turned to rental units, which sent demand up, and was a catalyst for many large, new housing projects across the nation. As the new year starts, however, there is fear vacancy rates could be on the rise and could suppress more would-be projects going forward.
Bright spots remain, with packaging and automotive expected to provide substantial growth. Should inflation continue to fall and sentiment continue to pick up, the “soft landing” could be achieved. This would be a big win for the Federal Reserve and would increase demand for later parts of the year.
Physical Market Still Leaning Negative
This slight positivity has not translated into the physical markets yet. Shipment data for December has begun to trickle in, and the decline is apparent. Sheet and plate shipments were down just over 5% year over year (y/y) and m/m. This put full year-to-date (YTD) growth at 3.5% over 2022. One of the largest declines was in the high-growth sector of can stock, which fell just over 7% y/y. This brought year-end totals slightly under forecasted volumes, but still with strong 4.6% growth YTD. Growth is expected to be positive in 2023, which is a good sign for the three new rolling mills being developed currently. New order data was similarly leaning negative, down 1.5% m/m. This was led mostly by a large drop in extruded products, which fell to one of the lowest points on record. Historically, this has been a new order level that is the low end for most of the troughs and where things start to rebound. This makes the next few months very important to see where momentum swings.
By Matthew Abrams, Matthew.Abrams@CRUGroup.Com
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