Weekly Market Update - December 18, 2014

Portland Cement Consumption ramped up 9.3%, 3 months y/y ending September, led by a 13.6%, 3 months y/y jump in the West South Central region and 13.3% rise in the South Atlantic region. All census regions posted gains as illustrated in Fig. 1. The total consumption of cement in the U.S. in September was 9.739 million short tons, 12.0% greater than for July 2013. Momentum (defined as 3 month percentage minus 12 month percentage), was up for the sixth month in row. Despite the strong y/y gain, national consumption levels remain depressed having only recovered to 2009 levels, (Fig. 2). Recovery rates show considerable variation throughout the nation, Fig. 3 compares all of the census regions on one chart, back to 2004. To compare relative growth rate, in Fig. 4, we examine four regions consumption history with that of the U.S. as a whole, (with equal axis scales). From this four region example set, we can see that the West South Central region has exhibited the strongest recovery, while the Mountain and Pacific regions were comparatively weaker. The South Atlantic recovery has been about the same as the overall U.S. recovery.

Fig 1

Rig Count and Energy Prices: Fig. 5 shows the Baker Hughes North American Rotary Rig Count which is a weekly census of the number of drilling rigs actively exploring for or developing oil or natural gas in the United States and Canada. Rigs are considered active from the time they break ground until the time they reach their target depth. Data is current through December 12th and shows that the total North American rig count declined by 35 since November 14th, oil being down by 31 and gas by 4. It looks as though the gas rig count has bottomed out and that the decline in the price of oil has begun to bite into new oil well activity. On December 8th the price of West Texas intermediate delivered Cushing Oklahoma had fallen to $63.13 per barrel with no sign of a decline in the rate of fall, (Fig. 6). The price of natural gas delivered the Henry Hub in Louisiana on December 5th was $3.75 / MM BTU, its lowest level in 2014. On December 13th Armada Exec Intelligence reported that OPEC has lost much of its punch and the cartel is finding it difficult to keep members together. Many producer nations, including those not members of OPEC, won’t be able to balance their Federal budgets this year or next and, as consumers in those countries start to find it difficult to purchase food, shelter, and clothing, they will begin to put pressure on their governments. Those leaders will have to do something to try and prop up their economies – and they have nothing to fall back on. The result will be a catastrophic drop in economic activity for some of those nations. The problem is that the price of oil has fallen too fast and they haven't had time to adjust.

Fig 5

Investigation into the Accuracy of Long Product Import License Data: Licensed import data is reported on the first Tuesday of each month for the previous month which makes it a very prompt tool for the investigation of import volume. These licenses can be applied for at any time between when the vessel ships to ten days after it arrives so there is not an exact overlap with a calendar month of receipts. We decided to investigate the degree to which the license numbers for long rolled products accurately predict the final volume. Table 1 shows the difference between final and licensed tonnage by product for the first ten months of 2014. Overall for long products the accuracy is extremely good, the licensed tonnage being within 1% of what actually arrived. In all cases except rebar the final tonnage was more than what was licensed. We assume that actual can be more than licenses because permits can be obtained after the steel has arrived in the U.S., the date of the license can vary by weeks but the date of arrival is a fact. Our conclusion from this investigation is that the ability of the licensed data to predict the final volume of long product imports is remarkably good.

Table 1

Currencies Report: The U.S. Dollar Index came in at 110.34, the highest since March 2009 and has strengthened 8.7% on a y/y basis and 5.5% over the past three months against the Daily Broad Index. A strong economy, relative to the rest of the world, has helped the Dollar strengthen to five year highs, (Table 2). The Dollar strengthening makes scrap from the U.S. less attractive to buy on the global market and steel less attractive to buy from the U.S.

The Russian Ruble has fallen more than 42% on a y/y basis and roughly 50% 2014 YTD. In the last month the Ruble dropped almost 17% as oil prices continue to tumble in part to a global oil glut, Western sanctions, and weaker demand. The currency has continuously reached all-time lows versus the U.S. Dollar, with a value as of December 16th of 56.7876, with an intraday drop of 11%. The state of the currency brings back memories of the 1998 financial crisis that hit Russia which, inevitably, forced them to default on its debt. The Russian Central Bank attempted two recent interest rate hikes of 100 and 650 basis points which did nothing to calm the markets or prevent another decline in the currency.

The Ukrainian Hryvnia has fallen more than 47% on a y/y basis and 18% in the last three months. The Hryvnia is trading currently at a value of 15.50 per U.S. Dollar, its lowest on record. The eastern part of the country, including the annexed Crimea region, has given up using the Hryvnia for the Russian Ruble, which attributes to its decline. Ukraine has relied on support from the IMF in the form of loans to prop up the economy and the currency; however, the next loan payment may be delayed. Conditions for additional loans depended on austerity measures and economic reform. Ukrainian residents have led a bank run removing deposits at a record pace which leaves the banks near insolvency. Ukraine may fall even further into crisis without help from the IMF or Western institutions.

Table 2

U.S. Scrap Exports, (USITC): Scrap exports rebounded in October to 1.34 million metric tons, a 15% m/m increase. Year to date through October scrap exports totaled 12.904 MMT, down 17.6% compared to the same period one year ago, (Fig. 7). Turkey continued to be the top importer importing 417,000 MT October and 3.191 MMT YTD, down 28.4% YTD y/y. Year to date Turkey accounts for 24.7% of total U.S. scrap exports. The next largest importer was Taiwan bringing in 203,000 MT in October and 2.26 MMT YTD y/y off 12.4% from the same timeframe in 2013. Fig. 8 presents the top four (Turkey, Taiwan, S. Korea and China) U.S. scrap importers as a stacked bar chart. Total export volume is shown as a black line. U.S. exports ramped up from 2005 to 2011 and have been in decline since then. The rising U.S. dollar and depreciating currencies (Japan, EU, etc.), elsewhere are the primary reason.

Fig 7

Architectural Billings Index: The American Institute of Architects reported that the national ABI reported 50.9 In November, off 2.8 points from last month’s reading yet still positive (>50 = expanding billings). Regional values include: South (57.9), West (52.), Midwest (49.8) and Northeast (46.7). The sub-index for institutional posted a 51.3, while the commercial / industrial sector reported 50.6, (Fig. 9). The score for the design contracts in November was 54.9. The ABI is a good proxyof future (forward 12 to 18 months) non-residential construction activity. Here is a quote from AIA Chief Economist Kermit Baker, Hon. AIA, PhD: “Demand for design services has slowed somewhat from the torrid pace of the summer, but all project sectors are seeing at least modest growth,” said AIA Chief Economist Kermit Baker, Hon. AIA, PhD. “Architecture firms are expecting solid mid-single digit gains in revenue for 2014, but heading into 2015, they are concerned with finding quality contractors for projects, coping with volatile construction materials costs and with finding qualified architecture staff for their firms.”

Fig 9

Steel Demand Indicators: Table 3 is a snapshot of the market situation on 12/18/2014. Of the twenty seven indicators under consideration, the present situation of twelve are now positive by historical standards, eight are neutral and seven are negative. There were no changes to our classification of indicators as of today’s date. In our trends analysis, most of the values reported are three month moving averages to avoid the knee jerk reactions that are characteristic of most economic reports in the press. Please note that there is nothing subjective about this trends analysis. The numbers presented here are the latest facts available as of today’s date. There was a change of only one in the direction of trends since last we published on December 4th. The price of Chicago shredded which had declined by $30 in November was unchanged in December. Overall trends are still good with 17 of 27 indicators moving in the right direction. Nine moved negatively and one was unchanged.

The latest month or quarter for which data is included is identified in the 2nd column. Indicators updated since last published are shaded beige. (Explanation of Indicators).

Table 3

Contributors this week include; Bryan Drozdowski, Peter Wright and Steve Murphy