Weekly Market Update - September 22, 2016

Industrial Construction Starts were down 20.6%, to $188.4 Bn (12 month rolling total), compared to August 2015. On a 3 month y/y basis starts increased 1.5%, subsequently momentum was a very positive +22.1%. Power projects declined 18.3%, 3 months y/y but were up 1.4% on a 12 month y/y metric. Production oil & gas starts dropped by 34.6%, 3 months y/y and plunged 88.3% y/y as oil prices remained depressed, trading in the low to mid-$40 range.

Despite the sharp percentage y/y decline, expenditures are still high relative to historic values. As Figure 1 illustrates, industrial construction starts in 2016 are right on the long term trend line. Outlays in 2013 through 2014 were well above trend.

Project categories performing well 3 months y/y include Alterative fuel (+575%), Food & beverage (+68%), Petroleum refining (+62%), Terminals oil & gas (+28%), Transmission oil & gas (+21%), Pharmaceuticals & biotech (13.6%) and Pulp, paper & wood (+11.6%), (Table 1).

Of the 12 project categories, 8 posted growth 3 month y/y. In an encouraging sign that expenditures may be on the upswing, 8 of the 12 project categories posted positive momentum. Figure 2 illustrates industrial starts by census region showing the y/y change in percent as well as the 12 month total expenditure. Regions recording double digit declines include; The Southwest (-61.4%) and the Middle-Atlantic (-28.1%). Regions posting significant growth include; The Northeast (+92.4%), West Coast (+26.8%) and the West North Central (+18.6%).

Figure 3 presents confirmed project starts through December 2016 on a 12 month basis, along with a 12 month y/y change. The Northeast (+102.4%) followed by the Westcoast (+39.3%), Middle Atlantic (+18.4%) and Southeast (+10.3%) are showing solid growth, while the nation’s mid-section is showing double digit declines. Low energy prices are no doubt disproportionally impacting this part of the country.

Figure 4 compares the twelve project categories 12 month totals through August for 2014, 2015 and 2016. Power, Industrial manufacturing, Food & beverage and Pulp, paper & wood are all running stronger in 2016 than in 2015. Metals and minerals, Chemical processing, Production (oil & gas) and Alternative fuels are all down from previous years. The remaining categories show little change in expenditure terms y/y.

Canadian industrial starts were down 18.9%, 3 months y/y and flat (-0.5%), on a 12 month y/y comparison. Energy related projects were the principal reason for the large reduction with Production oil & gas and petroleum refining down to zero dollars, 3 months y/y. Transmission oil & gas, Chemical processing, Alternative fuel, Pulp, paper & wood and Pharmaceuticals all posted large double digit declines, (Figure 5, Table 2).

Regionally expenditures through 12 months in Western Canada were up 30.4% and accounted for 61.6% of total expenditures for all of Canada. On a 3 month y/y basis, expenditures in Western Canada were down 29.5% and the ratio of the total fell to 54.7%. Quebec was the only region to post positive growth numbers in each of 12 and 3 month y/y comparisons, up 19.8% y/y, improving to +90.6%, 3 month y/y.

Figure 1

Table 1

Figure 2

Figure 4

U.S. Metal Service Center Shipment, Inventory and Intake Report: Overall carbon shipments (Flat + Longs) are pacing 7.2% lower YTD y/y. Shipments picked up for both bar and structural on a month on month basis but there were three more shipping days in August than in July so the percentage increase m/m is not of much use. On a three month moving average y/y comparison overall shipments fell 6.6%. Plate fell the most, down 24.2% followed by bar & shapes off 18.9%, structurals off 5.5%, and sheet down the least at -1.9%, (Table 3). Overall intake fell 2.9%, 3 MMA y/y. Pipe & tube intake fell 15.4%, 3MMA y/y, followed by bar & shapes, -17.6%. Structurals increased by 2.8%, sheet intake also edged up by 1.1%, 3 MMA y/y. Inventory levels fell across the board, down 14.9%. Pipe & tube inventory plunged by 28.4%, plate was down 21.0%, bar & shapes fell 17.5%. Structural inventory fell the least, down just 0.4%, 3MMA y/y.

Figure 6 charts carbon steel daily shipments from 2007 to present. The Y axis employs base 100 referencing the period between 2007 and 2008 as the peak shipment period and associating all subsequent postings to it. Both bar (44.8%) and structurals (51.8%) remain depressed. Thus far in 2016, bar & shapes are drifting lower, while structural are showing a slight upturn. Sheet is performing much better by comparison, currently shipping at 76.4% of its 2007 peak.

Table 3

Canadian Metal Service Center Shipment, Inventory and Intake Report: Canadian service center steel shipments (flats + longs) are pacing 8.5% lower YTD y/y. In August, overall shipments fell by 12.7%, 3MMA y/y, (note MSCI no longer reports on structural steel in Canada), as pipe & tube shipments fell, 15.9%, plate was off by 18.4% and sheet shipments slipped 12.7%, 3MMA y/y. Bar & shapes bucked the trend rising 2.2%, 3MMA y/y.

Overall inventories plummeted 19.0% led downward by sheet, off 26.9% 3MMA y/y while bar and shapes inventory increased 2.2% over the same timeframe, (Table 4). Intake was a mixed bag with plate and bar & shapes increasing by 12.8%, and 7.4%, 3MMA y/y respectfully. Pipe & tube intake fell 14.9%, and sheet intake declined by 1.2%, 3MMA y/y.

Figure 7 charts carbon steel daily shipments from 2007 to present. The Y axis employs base 100 referencing the period between 2007 and 2008 as the peak shipment period and associating all subsequent postings to it.

Structurals had rebounded into the +100% range in mid-2012 before sliding back into the 70 to 90% range in 2013 and 2015 period. MSCI structural data-capture for structurals was discontinued commencing this past January. Bar & shapes staged a strong recovery after the recession ended in the period between 2009 through mid-2012 and then started to drift lower, plateauing in the 2012 to 2015 timeframe. The most recent data point for August spiked to 77.3% from 72.7% in July and from 59.1% in June.

Figure 3

Architectural Billings Index: In a report released by the American Institute of Architects on September 21st the architectural billings index score was 49.7, down 1.8 points from August. Six out of the past eight months this score was above 50, and as defined by the AIA’s index, (any score above 50 indicates an increase for design services). The ABI, a leading economic indicator of construction activity, typically leads construction put-in-place (CPIP) numbers by 9 to 12 months, providing a forward look at the US construction market. To smooth the volatility of month over month data, an analysis of the 3 month moving average (MMA) reflects a positive index in new project inquiries (59.3) and at the national level index (51.3), (Table 5). Regionally, the Southern ABI US showed healthy demand up 1.5% y/y, as the ABI for the Mid-west, Northeast and Western US fell 3 months y/y, (Figure 8).

The sub-indexes for commercial and industrial (50.8), and institutional (50.7) remained positive, yet were down 3 months year over year, (Figure 9). Multi-family (50.9) fell for a second month, yet rose 8.8% 3MMA y/y, and showed positive momentum when contrasted with the 12 MMA y/y change. Commercial/industrial and institutional 12 MMA were down -0.5% and -5.8% respectively, indicating a slowing of demand for design and project inquiries. Figure 10 shows the correlation of inquiries to actual billings with a correlation of 0.800 from 2009 to present. August is the first month, since 2010, that these two data points have not tracked together, implying listlessness in construction design. However, the institute’s chief economist Kermit Baker, Hon, AIA, PhD elaborated on this data and was quoted, “Given the solid numbers for new design contracts and project inquiries, it doesn’t appear that this is the beginning of a broader downturn in the design and construction industry.”

Table 5

Homebuilder Confidence in September and Housing starts through August: Homebuilder sentiment accelerated markedly in September driven particularly by the Western region and exceeded analysts’ expectations. The NAHB index of builder confidence rose to 65, up 6 points from August. Any number > 50 indicates positive confidence. The 3MMA rose from 59.0 to 60.7, (Figure 11). Both present and future sales components are strong, which is consistent with Moody’s expectation of robust housing growth through the end of next year. The current sales component is now at its highest value since October 2005, and the future sales component is at an 11-month high. The bulk of the 6-point gain was driven by a massive 14-point improvement in the West, the nation's most optimistic region. According to the NAHB, "solid job creation and low interest rates are fueling demand." The inventory-to-sales ratio is also hovering around a 4.3-month supply at the current sales pace, with a reading under six months indicating tight inventories. Therefore, builders will need to ramp up construction efforts to keep pace with consumer needs.

The housing market is important as a driver of steel consumption not only for the steel that is actually in a house but for the supporting infrastructure and services such as schools, offices and other services and places of employment. The housing starts results for August contrast markedly with the builder confidence described above. Starts have gone nowhere in the last 12 months. Total housing starts in August were at an annual rate of 1,142,000 units, down from 1,212,000 in July and 1,195,000 in June. Starts in August were little changed from the 1,132,000 in August last year. The 3MMA in August was 1,183,000 which was up from 1,178,000 in July. Through 2015 we had been predicting a return to 1.4 million units annualized by mid-2017 but that assumption is now questionable. The 3MMA has been range bound since last June between 1,156,000 and 1,183,000, (Figure 12).

Single family starts in August were at an annual rate of 722,000 with a 3MMA of 751,000. The 3MMA was up by 3.5% year over year but is still 60.4% below the peak of late 2005. Multifamily, (apartments / condominiums) starts in August were at an annual rate of 420,000 units with a 3MMA of 432,000, down by 1.4% y/y. (Figure 13). In the last year the ratio of single family to multi-family has been at a level not seen since the 1980s, (Figure 14), this may be about to change which has implications for nonresidential construction since most multi-family units are in cities and most single family are in the suburbs. The traditional mix of housing, schools, and retail construction must have been affected by the ratio of single to multifamily and may be part of the reason why nonresidential construction has had a slow recovery.

Figure 15 shows the regional situation for the 3MMA of total residential starts since January 2000. There is a significant difference between regions. The South and West have been flat for a year or more and recent gains in the North East have been countered by declines in the Mid-West.

Figure 11

Figure 12

Global steel production in August: China is picking up the pace again as the rest of the world has contracted for 18 straight months through July and experienced a slight positive 0.1% growth in August. With a global capacity utilization of less than 69% in July and August it is evident that capacity reductions have a long way to go before they begin to reduce the market pressure of over production. According to the OECD capacity will continue to increase through 2018. To make matters worse, global economic growth is slowing.

Production in the month of August at 134,125,000 metric tons was up by 0.2% from July and the three month moving average, (3MMA) was down by 0.13 from July. Capacity is 2.35 billion tonnes per year and the 3MMA of capacity utilization in August was 68.8%. Figure 16 shows monthly production and capacity utilization since January 2000. On a tons / day basis production in August was 4.327 million tonnes, up by 0.2% from July. Since the recession, capacity utilization has been on a steadily downward trajectory with an upward blip in the first few months of 2016. Capacity utilization in the three months through August at 68.8% was down from 70.0% in three months through August last year. More bad news is that year over year the 3MMA of production was up by 1.3% and the momentum of production has increased for seven consecutive months. On September 9th the OECD’s steel committee reported that global capacity is expected to increase by almost 58 million tonnes / year between 2016 and 2018 bringing the total to 2.43 billion tonnes.

We believe it’s necessary to look at the year over year change in the three month moving average to eliminate seasonality and on this basis August was disappointing in that production increased. Figure 17 shows the change in growth rate since January 2005. Production began to contract in March last year and the contraction accelerated through January this year when it reached 5.8%. In the next four months contraction slowed and in May was zero. June, July and August have had year on year increases in the 3MMA of 0.1%, 0.7% and 1.3%. The much desired slowdown in global steel production has reversed course on a year over year basis and China has been the driver.

Table 6 shows global production broken down into regions and also the production of the top ten nations in the single month of August and their share of the global total. It also shows the latest three months and twelve months production through August with year over year growth rates for each period. Regions are shown in white font and individual nations in beige. The world as a whole had positive growth of 1.3% in 3 months and negative 2.0% in 12 months through August. If the three month growth rate exceeds the twelve month we interpret this to be a sign of positive momentum which has been the case for the last seven months. The corresponding figures for China are a 2.4% growth in 3 months and a 1.0% contraction in 12 months.

On a regional basis in 3 months through August year over year, South America and the EU declined by 9.4% and 3.5% respectively. Asia as a whole was up by 2.7% with India up by 8.6%. Other Europe, (mainly Turkey), was up by 8.3% and North America was down by 1.6%. Within North America the US was down by 2.8%, Canada was down by 0.2% and Mexico up by 7.0%.

Figure 16

Figure 17

Steel Demand Indicators: Table 7 is a snapshot of the market situation on 9/22/2016. Indicators updated since we last published two weeks ago are shaded beige. In most cases this is not August / September data but data that was released in those months for previous months, the actual month to which the data relates is shown in the second column. Of the 27 indicators under consideration, the present situation of 5 are positive by historical standards, 8 are negative and 14 are neutral. This was an increase of one positive and a decrease of one neutral since our last update on September 8th. The change that occurred was to our view of the service center inventory level for long products. The months on hand decreased from 2.96 in July to 2.52 in August. There were no changes in our perception of the other 26 indicators.

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 facts available as of September 22nd 2016. The number of indicators trending positive in this latest analysis was 15 with 12 trending negative. This was a net increase of two positive and a decrease of two unchanged. The changes that occurred were as follows. The broad index value of the US $ which had trended negative in July reversed course and declined in August. We regard a declining dollar as positive because of the effect on net imports. The price of Chicago shredded which had been unchanged in August, declined in September which we classify as a negative trend. The price of rebar CIF Houston which was unchanged in August, declined in September. Service center inventories increased in July and declined in August as described by months on hand. There were no changes in the direction of trends of any of the construction and manufacturing indicators.

We have separated the leading indicators from the main table for a closer look, these are shown in Table 8. Of the twelve leading indicators nine are trending positive, and three negative. This was an increase of one positive since our September 8th update. The change was in the service center inventory level of all long products which we regard as leading future intake from the mills. In summary the present situation is historically weak but trends are good which leads us to have confidence in the long products business environment into the 4th quarter.
(Explanation of Indicators).

Table 7

Contributors this week include; Laura Remington, Peter Wright and Steve Murphy