Thursday
Feb262015

Weekly Market Update - February 26, 2015

Non-residential Growth Forecast, (AIA): Twice per year in February and July, seven entities estimate the rate of growth y/y for the non-residential construction (NRC) sector. The estimates are broken down into several sub-categories to include: Commercial, Industrial and Institutional. Commercial and Institutional are broken down into further smaller sub-categories. The American Institute of Architects compiles the seven individual firms’ estimates and develops a consensus forecast, (Table 1). There was a range of estimated 2014 NRC expenditures between firms ranging from $312.9 Bn to $370.5 Bn. Throwing out the highest and the lowest estimates, the average was $321 Bn.

The latest consensus forecast predicts a y/y growth of 7.7% for 2015 and 8.2% for 2016. Comparing the predictions in Table 1 reveals considerable variation between firms. For example for the top-line, overall NRC in 2015, the estimates range from a low of 4.9%, from Associated Builders and Contractors, to a high of 11.1% from IHS Global. Table 2 presents the “high”, “low” and “range” for each project category and is color coded by the firm that made the prediction. As you can see there is substantial variation between firms and among project types. An extreme example of this is in the project category of Amusement/Recreation where the range of forecasted expenditures is 31.2%; from a negative 1.2% from IHS Global to positive a 30% from Moody’s.

Table 3 presents each firms prediction compared to the consensus forecast. The values in each sub-table are the firm’s value minus the consensus value, i.e. Moodys’ NRC total in Table 1 = 7.4% minus the consensus NRC total in Table 1 = 7.7%. Therefore 7.4% – 7.7% = -0.3%, this is the value under 2015 for Moody’s in Table 2. After making these calculations for each firm for each of 2015 and 2016 the firms were ranked left to right from the lowest to the highest delta from the consensus forecast. A delta in the negative direction = increasingly pessimistic, while a delta in the positive direction = increasingly optimistic). From this analysis we can see that Moody’s forecast is the closest to the consensus and McGraw Hill (Dodge) is the furthest from the consensus forecast. We can also determine that McGraw Hill (Dodge) is the most “bullish” about the future of NRC, while the Associated Builders and Contractors are the most pessimistic. One thing’s for certain, forecasting non-residential construction is a challenge.

Table 1 

 

Table 2

 

Global Steel Production and Capacity Utilization, January 2015: Production in January on a tons / day basis was 4.294 million tonnes and has been declining for seven months since June. Total January production was 133.1 million tonnes. If we look at the three month moving average and plot it over time we see that there has been a significant decline in the second half of the year since and including 2010 which sometimes extends into January and February, (Fig. 1). As production has increased each year since the recession, capacity utilization has decreased, the gap is widening. Table 4 shows global production broken down into regions and also the production of the top ten nations in the single month of January and their share of the global total. It also shows three months production through January and twelve months through January with year over year growth rates for each. Regions are shown in white font and individual nations in beige. If the three month growth rate exceeds the twelve month we interpret this to be a sign of positive momentum and accelerating growth. The reverse is the case today. In three months through November y/y global growth declined to exactly zero, in three months through December it bounced back to 1.1% and in three months through January declined again to 0.2%. The growth rate in twelve months through January 2015 was 1.3% compared to all of 2013 which was up by 7.0% from 2012. In the three months through January there were significant differences in regional y/y growth. Europe and the CIS both contracted, North America eked out a 1.0% growth with the US achieving 1.9%, South America grew by 3.1% and Asia by 1.0%. South Korea which through the first ten months of 2014 had the fastest growth rate in the world contracted at a 0.4% rate in three months through January. China’s grew 1.2% in three months through January compared to 1.5% in twelve months suggesting a slight slowing. Japan had a negative 2.1% growth in Q4 and negative 2.9% in the last three months. The effect of the war in Ukraine is clear in the contraction of that country’s steel production. Fig. 2 shows the 3MMA of the monthly y/y growth of global steel production which prior to December had been falling for six months. Growth in January was so low as not to make a blip on this chart. The recent decline in the price of oil, of iron ore and of the Baltic Index suggests that the global economy is weakening. Certainly there is a supply side to all three of those measures but it seems that demand is also down and suggests a further slowdown in global steel production in 2015.

Fig 1 

 


Table 4

 

NAFTA Vehicle Production. January 2015, (Source Ward’s Automotive): The vehicle sales year had a good start in January with 16.7 million units on a seasonally adjusted annualized basis. Light trucks are benefiting from lower gas prices and reached 55% of light vehicle sales, the highest since 2014. This is good for the US assembly plants because the US light truck production is much higher than autos, (see Table 5). Also auto imports are higher than light trucks so the increasing sales of light trucks benefits US assembly plants disproportionately. Import market share in January was 20.36% down from 21.3% in December.

Total light vehicle production in NAFTA in January was at an annual rate of 15,920,000 units, up by 1.2 million from December or 8.1%. On average since 2004, January’s production has been 2.4% higher than December’s, therefore this result is encouraging. Note: these production numbers are not seasonally adjusted, the sales data reported above are seasonally adjusted. On a rolling 12 months basis y/y light vehicle production in NAFTA increased by 4.8% through January, is now well above the pre-recession peak and is heading for the all-time high of mid-2000, (Fig. 3). On this basis the US is up by 4.9%, Canada is down by 2.4% and Mexico is up by 10.2%, (Table 5). For NAFTA as a whole on a rolling 12 month basis year over year, light truck production was up by 8.5% and autos were unchanged. In the last year growth has once again begun to favor Mexico over the US as Canada has contracted every month for a year and a half. In 12 months through January, US production was 11,368,000 units, Canadian production was 2,315,000 units and Mexican production was 3,211,000 units.

Total light vehicle inventories in the US increased by 20 days of sales in January to 81 days but this is still 9 days lower than January last year. Month over month FCA (Fiat Chrysler Automotive) was up by 29 days to 102, Ford by 15 days to 87 and GM by 24 to 94 days.

Fig 3 

Table 5

Long Product Shipments, (SMA): Total long products (rebar, beams, structurals, merchant products), apparent domestic consumption (ADC = Domestic mill shipments + imports), grew 7.2% y/y but fell 1.3%, 3 months y/y ending January 2015, (Table 6). Most product groups posted declines on a 3 months y/y, the exceptions were beams and other structural shapes. This performance contrasts sharply with the y/y performance in which case every product recorded solid gains ranging from 4.6% for merchants to 12.0% for beams. Year to date through January 2015, long products imports totaled 4.68 million tons, 20.0% of the total for market. Fig. 4 presents a chart of the US long product market dating back to 2004. Domestic and import shipments are presented as a stacked bar chart and import market-share as a line read on the right axis. US mill shipments (domestic shipments + exports), were up 2.4% y/y but off 6.7%, 3 month y/y ending January. What this means is that while the US market size grew by 7.2% y/y US mill shipments only rose 2.4% y/y. Adjusting for exports which plummeted by 22.6% y/y, long product supply to the domestic market increased by 4.8%. This means that the imports gained most of the market size gain over the past year. In fact long product imports increased from 3,954,000 tons in the 12 months ending January 2014 to 4,685,000 tons for the 12 months ending January 2015, an 18.5% y/y increase.

In Fig. 5, we plot apparent domestic consumption (domestic shipments plus imports) in three month clusters as a percentage of the total ADC for the previous 12 months. The three months segments start with February-March-April and end the year with November-December-January. The label on the chart references January of that year, i.e. November-December-January ends in January 2015. What is striking about this chart is the change in the distribution of three month interval shipments for the most recent year. For the years 2012, 2013 and 2014, shipments remain in a tight ranging from 23.5% to 26%. In 2015 the distribution between 3 month intervals widens considerably. It appears that mill consumers (service center, fabricators and OEMs) may have been anticipating lower pricing and were therefore holding off on new orders. MCSI data shows that the average months on hand (MOH) for long products for the 22 months through October was 2.41, while for the three months ending January, MOH rose to 2.78. This indicates that additional intake was not required. Another possibility is that the real demand for long products is softening. The continued steady improvement in both the construction and manufacturing arenas seem to negate this.

Table 6 



Fig 4

U.S. Consumer Credit rose 0.5% during December, following 40 consecutive months of growth, and was up 6.9% y/y. Installment loans continue to support increasing consumer credit balances which rose 0.4% m/m and was up 8.2% y/y, (Fig. 6). Revolving credit lines rose 0.7% in December the largest month over month increase for revolving credit since May 2012. Year on year revolving credit was up 3.5% the largest y/y increase since September 2008. Major credit holders include depository institutions, finance companies, credit unions, and federal loans. Credit lines from finance companies rose 0.5% y/y, after falling for three consecutive years. Finance company loans were surpassed by federal loans, as federal loans rose over the last four years, while finance company loans stayed flat. Federal held credit include those originated by the department of education and other federal education programs, was up 15.4% y/y, (Fig. 7).

Fig 6 

Chinese Steel Production and Exports: Through December 2014, China has produced 1,125,500 thousand tonnes (Kt) of crude steel per China Metals Weekly, a 5.5% increase over the 2013 level, (Fig. 8). Chinese global exports totaled 91,587 Kt in 2014 up 66.7% y/y and representing 8.1% of production.

Chinese long products production was 518,219 Kt in 2014, up 2.9% y/y. Long product global exports were 35,466.5 Kt, up 67.2% y/y, 6.8% of production in 2014, (Fig. 9). Fig. 10 breaks long product production down into product segments. Rebar is the largest product at 215,277 Kt or 41.5% of total long products production followed by wire rod at 153,832 Kt or 29.7% of total long product output.

Chinese exports to the US per S.I.M.A were 2,900 Kt in 2014, up 62.6% from the 1,784 Kt exported in 2013. Drilling down further into this value, of the 2,900 Kt exports to the US in 2014, 429,700 tonnes were long products leaving 2,471 Kt of “all other” which includes flat rolled, pipe, tube, semis, etc. Of the 429,700 tonnes of long products exported to the US, 79.1% was wire rod and 17.1% was hot rolled bars.

Fig 8

Durable Goods orders, seasonally adjusted, chipped away at December’s decline by jumping 2.8%. The total dollar value was $236,147 million. January’s advanced reading was up 1.5% on a y/y basis. The biggest increase was Nondefense aircraft and parts, increasing 128.5% from December. January’s advanced reading was still down 21% from the all-time high in July of $299,862 million. The next highest was nondefense capital goods, jumping up 9.5% in January. This component is a widely used indicator of business investment in GDP calculations. Overall, most component readings were mixed, (Fig. 11).

Fig 11

Corporate Profits increased 3.1% on a q/q basis, from $2,106 billion to $2,170 billion for Q3 2014. This figure is also up 1.4% on a y/y basis, (Fig.12). These are rather healthy upticks coming off of Q1’s worst performance since 2008. Q3 GDP increased substantially at 5.0%, aiding the corporate profit figures. The harsh weather played a particular factor in that reading and could foreshadow a similar response for Q1 2015. Financial industry profits increased 3.6% over the second quarter while nonfinancial corporate profits jumped 2.5%. Of the nonfinancial component, manufacturing profits grew by 19.3%. The “rest of the world” component, as per the BEA, also increased in the third quarter by 4.2%. Corporate profits are seeing all-time highs since the end of the recession.

Fig 12

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