Weekly Market Update May 23, 2013

MSCI Shipments and Inventory, U.S. and Canada: U.S. MSCI April shipments were up 1% m/m but are down 4.8% y/y. Structural shipments increased the most for the month, up 4% m/m although shipments are down 2% compared to one year ago, (Table 1). Overall, daily intake was down 4% m/m. Intake was off across all product groups with the exception of pipe and tube which jumped 14.3%. Inventory levels declined by 2.2% led by a large (3.6%) drop in Carbon flat rolled. Overall months of inventory on hand stood at 2.27 in April down from 2.57 this time last year. (Fig. 1) compares current shipment levels by product to levels enjoyed at the peak of the market in 2007, (2007 level = 100%). Flat rolled has recovered to 81.6% of the peak followed by plate at 80%, pipe & tube at 75.5%, and bar at 65.7%. Beams have had the weakest recovery reaching just 59.2% of the 2007 peak level. Overall Canadian MSCI April shipments increased 1.3% m/m but are down 8.3% on a y/y basis, (Table 2). Structural shipments surged 10.5% m/m but are off 8.7% y/y. Daily intake was down 13.6% m/m influenced by large drops in bar & shapes (23.8%) and flat roll (23.3%). Alternatively structural intake rose 7.2%, while plate was up 4.4%. Inventory levels were down 6.6% m/m with reduction across all product lines except structural which was up slightly. MOH for all products averages out to 3.09, ranging from 2.22 for pipe & tube to 3.52 for flat rolled. (Fig. 2) compares current shipment levels by product to market peaks set in 2007, (2007 level = 100%). Plate has fully recovered followed by pipe & tube at 81.8%, structurals at 80.8%, flat rolled at 73.8% and bar at 72.7%.	Table 1
Apparent long products domestic supply, fell by 5.4%, three months y/y in April. Rebar and beams posted small increases of 0.5% and 0.9% respectively. SBQ volume saw the largest decline, falling 27.7% three months y/y, followed by wire rod, down 20.1%. ADC was essentially flat (down 0.1%) compared to April a year ago. Wire rod was down 8.5% y/y and beams off 0.9% y/y. All other product groups posted gains, led by a 5.2% increase in rebar consumption. Overall momentum is down 5.2% heavily influenced by a 30% negative momentum for SBQ products. Beams were the only product with positive momentum, up 1.8%. U.S. mill shipments (which include exports) fell 4.5% three months y/y and 0.6% 12 months y/y. The only product group to show an increase was rebar on a y/y basis, up 4.0%. All products posted negative momentum averaging 3.8% for all products and ranging from -1.0% for light shapes to -31.9% for SBQ, (Table 3). (Fig. 3) illustrates the sharp decline in SBQ market since the recent peak in early 2012. During the first six months of 2012, supply averaged 568,815 tpm. The last six months of 2012 supply dwindled to an average of 448,512 tpm. For the three months ending March 2013, the supply average fell to just 411,825 tpm. During this timeframe import market-share soared from an average of 24.5% (1st six months 2012) to 27.2% (last six months 2012) to 30.8% so far in 2013. The top SBQ exporters to the U.S. in 2012 were: Canada (28% of tota1) the U.K., (20%), Germany (10%) and China (9% YTD).	Table 3
Rig count, oil and gas prices: The price of natural gas is falling; the latest natural gas price was $3.35 per thousand cubic feet, recovered from the low of $1.89 in April 2012 but down from the $4.35 average from 2010 through mid-2011 . Conversely, the price of oil is climbing: Brent crude oil latest price was $104.55 per barrel, up from a recent low of $89.22 in June of last year, (Fig. 4). The total number of rigs stands at 1,769 (52 off-shore) down 10.9% from the 1,986 (47 off-shore) pumping this time last year. The oil/gas split has changed considerably; currently 1,408 oil/ 354 gas compared to 1,382/600 one year ago and 954/866 two years ago, (Fig. 5). Note that the two charts are very similar in appearance. The price of gas is falling and so is the number of gas rigs, the reverse is true of oil. On May 21st, the Department of Energy approved the application of Freeport LNG Expansion L.P. and FLNG Liquefaction, LLC to export LNG. Here is a brief summary from the freeportlng website: Because of a dramatic increase in US natural gas resource base, primarily shale gas, the U.S. now has more than one hundred years of supply. Further, due to increased production, gas prices have fallen to the point that exporting natural gas is economically attractive, and these relatively low prices are expected to continue. As a result, Freeport LNG is developing an expansion of its terminal to enable liquefaction and export of approximately 1.9 billion cubic feet per day of US natural gas in the form of LNG. The terminal will still be able to import LNG if it is needed for the domestic market. Fully built, the proposed expansion will require over $10.0 billion in direct investment and will employ more than 3,500 workers during a four- to five-year construction period. In addition, the plant will create thousands of jobs related to the production of the natural gas that will supply the liquefaction project. The increase in natural gas production is also estimated to provide between $4.3 billion to $6.2 billion in total annual economic benefits to the U.S. and LNG exports will reduce the US foreign trade imbalance by approximately 1%.	Fig 4 Fig 5
Currencies and Broad Index: The Japanese Yen has continued to depreciate, reaching a near 5 year low of 103.19 on May 20th. It has declined 23.5% on a year over year basis, (Fig. 6). The new monetary and fiscal policy, “Abenomics”, named after Japan’s Prime Minister Shinzo Abe, has weakened the Yen and driven the Nikkei Index to a five year high. Abenomics appear to be helping Japanese exports market as well, with a 3.8% increase in April. As of May 20th, the U.S. dollar has appreciated 0.9% against the Broad Index over the last three months. It also strengthened after Ben Bernanke testified to Congress, saying that an early rise in interest rates could negatively affect the economy; however, the bond buying program, Quantitative Easing, could “taper off” over the next couple of Federal Open Market Committee meetings. The dollar strengthening makes scrap from the US less attractive to buy on the global market and steel more attractive to sell in the U.S. A complete table of world steel exchange rates is presented in (Table 4).	Fig 6
European sovereign debt crisis: From the Economist, May 18th. “Any residual hopes of an early recovery in Europe were dashed by GDP figures for Q1 published on May 15th. Output shrank by 0.2% compared to Q4 2012, the sixth consecutive quarter of decline. Germany continued to just barely keep its head above water with 0.1% growth in Q1. Earlier this month the European Commission forecast that GDP in the EU as a whole would contract by 0.4% this year. Unemployment now stands at 12.1% in the Euro area, the highest on record going back to 1995, (Fig 7). In Germany the rate is just 5.4% but Spain and Greece have reached 27% and youth unemployment stands at 56% and 64% respectively.” John Mauldin commented last month: “The world economy is beginning to slow down, driven by Europe in particular. They have a monetary union which is artificial, and it keeps the peripheral nations from adjusting the value of their trade. Italy, Spain, Greece are on a type of gold standard called the Euro, and so there is trade imbalance - and then you get banking imbalances and then the governments run deficits. Unless you solve all three problems, you can't solve one problem. It's going to cost trillions of Euros to get back in balance. That creates depressions in the southern part of Europe which is a problem for Germany where 40% of its GDP is exports, and half of that is to Europe. This spills over to the US because we also export a lot to Europe and we have investments over there. Everything is connected.” As for the US, Lok Sang Ho noted in his blog on Wednesday that, “America is on a course of tackling its deficit problem because it did not opt for extreme austerity. In the current year the fiscal deficit could fall to $642 Billion, the smallest since 2008. This is 4% of GDP, less than half the 2009 shortfall which was 10.1%.	Fig 7

This week’s contributors include: Bryan Drozdowski, Peter Wright and Steve Murphy.