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Is U.S. ‘cash for clunkers’ program salvaging metals prices

Since the U.S. car scrappage scheme started last month, the spot price for aluminum is up 11%. palladium has increased 5% and platinum’s up 6%.

Last Thursday, the U.S. Senate voted to pump another $2 billion into the Car Allowance Rebate System (CARS) – better known as “Cash for Clunkers” – after the program blazed through its initial $1 billion funding in just one week.

The initiative, which offers rebates up to $4,500 to drivers who trade in their older, gas-guzzling cars for new and more fuel-efficient models, has certainly gotten Americans buying cars again (although for how long, nobody really knows).

But dealerships aren’t the only ones benefitting from the “cash for clunkers” frenzy. Industrial and precious metals have felt the boost as well.

Since CARS began on July 24, the spot price for aluminum is up 11%. Palladium has increased 5%. Platinum’s up 6%. And just check out the GFMS Base Metal Index, which averages the LME spot prices for primary aluminum, copper, lead, nickel, tin and zinc:

 

Not too shabby. Although prices have backed off slightly in the past day or two, it’s still enough to get some analysts waxing optimistic:

“It may not make a huge impact in tonnage, but the psychological impact will be greater than the material impact,” Michael Locker, of steel industry consulting firm Locker Associates, said to Reuters about the impact of Cash for Clunkers. “It may not knock the socks off, but it gives people a real basis for hope.”

But is this rally the start of something sustainable? Or are these prices just one-time blips? 

Markets Of Steel?

Automobile manufacturing requires a cornucopia of metals: steel for car bodies; cast iron or aluminum for engines; even platinum and palladium for catalytic converters (the scrubbers that clean up exhaust fumes). And as inventories deplete and The Big Three restart their production lines, it seems like demand for metals is back on the rise.

Steelmakers in particular could use the boost, as traditionally they’ve relied heavily on the U.S. auto industry for revenue. Take Ohio-based AK Steel (NYSE: AKS), for whom automakers comprise nearly one-third its customer base. The steel producer took a gut punch when GM and Chrysler stopped production lines earlier this year: In the recent earning season, AK Steel posted its third consecutive quarterly loss of $47 million, with a 57% drop in shipments and a 65% drop in revenues year-over-year.

But as Cash for Clunkers empties out dealerships, several auto manufacturers like Hyundai, Ford and GM have begun bumping up production again, and steelmakers have increased their output to keep up. In AK Steel’s recent earnings conference call, CEO James Wainscott suggested that steel shipments to automakers could now rise 40% in the second half of 2009.

The same refrain was echoed by Nucor Corp (NYSE: NUE) CEO Dan DiMicco, who told Reuters last week that “We are starting to see the benefit of things like Cash for Clunkers, where it has been stimulating increased automobile sales,” although DiMicco was careful to add that it would take “a month or two yet” for the CARS program to translate into increased orders.

But is it all just wishful thinking? As analysts have pointed out, the CARS program will probably only sell about 250,000 new cars – a nice start, but hardly a sustainable recovery. It’s especially underwhelming considering the staggering production drops across the industry since last September.

As Affiliated Research Group analyst Charles Bradford told Reuters CARS can’t erase the last several months of stalled steel production. “But it can’t hurt, with a little over 1 ton of steel per car.”

A Platinum Boost

About 60% of the platinum and palladium mined annually is used by the auto industry. And hopes for a Cash for Clunkers-inspired recovery has sent spot prices soaring, with platinum up 6% and palladium up 5% by mid-last week (although prices have come down a bit since then.)

But the rally may not continue. Scrap-metal salvagers will inevitably recycle the platinum and palladium in the trade-ins’ catalytic converters, and that metal should eventually find its way back into the supply stream. “This may help cap gains,” said HSBC precious metals analyst James Steel, according to the Wall Street Journal.

As the States’ only platinum metals miner, Stillwater Mining (NYSE: SWC) has had a bit of a mixed bag lately.

On the one hand, the company’s balance sheet is looking healthier. Stillwater posted a Q2 net profit of $4.2 million, up from a $7.4 million loss the previous quarter (although it’s still way off the $16.3 million profit the same quarter last year). And production has increased; at Stillwater’s Nye mine operation, 103,000 ounces have been mined so far in 2009, compared with 88,100 ounces last year – at a lower cost per ounce, too.

Yet Stillwater’s recent earnings report doesn’t take into account GM’s recent cancellation of its palladium and rhodium supply contracts, a prospect we discussed in “Platinum Group Metals: The GM Angle.” Citing costs, GM  axed its contracts – although it maintains its contracts with Russia and South African miners.

Since Stillwater is one of Montana’s largest employers, many in the state were incensed, said Senators Max Baucus and Jon Tester in a letter to GM CEO Fritz Henderson:

“We are not alone when we tell you this is a deeply offensive decision. …When GM accepted billions of dollars in money to keep the doors open, it was with the intent to save American jobs. This repugnant decision flies in the face of the spirit of the auto rescue, mere weeks after the agreement was reached.”

The loss will cost Stillwater anywhere from $5 million to $10 million annually. But the company isn’t too badly off; it still has a (much larger) contract with Ford, although that contract is set to expire in 2010. Stillwater also recycles catalytic converters, which should help offset some of the losses. 

Can It Last?

Even with the extension, Cash for Clunkers can’t last forever. As the WSJ says, the program may infuse some short-term pep into metals prices, but once the program’s done, it’s done – at which point metals prices could sag again, due to the continued uncertainty in the automotive industry.

But all things considered, the amount of cars sold under CARS is a drop in the bucket compared with the millions being produced overseas, and the future prices of these metals depend much more on what happens outside the U.S.  than within.

It’s like Bill O’Neill, of commodities research firm Logic Advisors, told the WSJ: “The real key to the market longer term is that we’re going to have a lot more cars on the road in India and China.” 

Article published courtesy of Hard Assets Investor – www.hardassetsinvestor.com

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