HardAssetsInvestor

Written by Lara Crigger  |

August 10, 2009

Is ‘Cash For Clunkers’ Salvaging Metals?

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The metals markets have seen a boost from the government's CARS program -– but can the good times last?

• The psychological impact of CARS
• ‘Wishful thinking' in the steel markets?
• Is U.S. platinum miner in trouble?

 

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."