Weekly Market Update - January 19, 2017

Architectural Billings Index: At Gerdau we follow the ABI because it is a leading economic indicator that offers a glimpse into the future of non-residential construction spending of approximately 12 months. The national ABI jumped 5.3 points in December to 55.9. In an encouraging trend for future construction activity, the ABI has been north of 50 for three consecutive months. The ABI typically leads construction put-in-place (CPPI) numbers by 9 to 12 months. Regionally the Midwest recorded the strongest score at 54.4, followed by the Northeast at 54.0, the South at 53.8. The West was the only region to record a decline in demand for design services with a score of 48.8.

Figure 1 charts the ABI sub-index for commercial / industrial, institutional and multi-story residential (MSR) projects from 2009 to present. Commercial/Industrial and Institutional sub-indexes surged to 54.3 and 53.3 respectively, while the MSR scored a 50.6.

Figure 2 presents awards for design contracts and measures the trends in new design contracts at architectural firms which provides a strong signal of future billings. The design contract index moved into positive territory in December with a 51.2, now north of 50 (expansionary) for two months in a row after falling to 48.7 in December.

Figure 1

Scrap Exports from the US: In the first eleven months of 2016 bulk scrap exports were 11,428,000 tonnes, down by 2.8% from the first 11 months of 2015. The tonnages shown in Figure 3 are based on three month moving averages for 2016 and on the annual monthly average for previous years. The graph shows that exports declined for four consecutive years, 2012 through 2015 continuing through the 1st Q of 2016 and have picked up since then. Exports in the single month of November were 1,123,000 tonnes with Turkey taking the most volume with 286,000 tonnes. There has only been one month since March 2015 in which Turkey wasn’t the major destination.

US scrap exports to the major Far Eastern buyers YTD were down by 6.2% year over year as the depreciated Yen allows Japan to pick up share in that region. Exports to Canada were up by 6.2% YTD and up by 18.9% to Mexico. Countries exceeding a million tonnes YTD were India, (1.07m), Mexico, (1.36m), Taiwan, (1.2m), and Turkey, (2.86m). South Korea fell out of this club in 2016 and is down by 27.5% YTD.

Figure 3

U.S. Industrial Production and Manufacturing Capacity Utilization: This data is from the Federal Reserve and is seasonally adjusted. The index is based on the May 2012 level being defined as 100. The Industrial Production Index had an all-time high of 106.70 in November 2014 and had trended down until June this year when it reversed the slide and began a gradual rebound, (Figure 4). The three month moving average, (3MMA) came in at 104.23 in December range-bound since July 2016. Year on year percentage change was a negative 1.0%. The y/y change posted its first positive value (+0.5%) after a string of 13 months of declines. Hopefully this is the beginning of a turn-a-round for manufacturing that has struggled to gain ground since peaking in January 2015.

Capacity utilization for the industrial sector increased 0.6 of a point in December to 75.5%, a rate that is 4.5 percentage points below its long-run (1972–2015) average. The specific sub-category capacity utilization figure for manufacturing was a shade lower at 74.8% in December. Service center all carbon steel shipments are correlated (0.74) to manufacturing capacity utilization, however breaking-out just long product carbon steel shipments, the correlation falls to just 0.502, Figure 5. This makes sense since we know that a high ratio of long products are consumed in construction projects.

Figure 4

Producer Price Indexes of Steel and Competing Materials through December 2016: The Producer Price Index (PPI) is a weighted index of prices measured at the wholesale, or producer level. A monthly release from the Bureau of Labor Statistics (BLS), the PPI shows trends within the wholesale markets, manufacturing industries and commodities markets. Figure 6 presents a historic review of all commodities from 2000 to present. Prices have largely plateaued for the past six months on a 3MMA y/y basis after rising through the middle of 2016. When examined on a y/y basis in percentage terms, overall commodity prices finally posted a gain of 0.9% after declining for 24 consecutive months.

The non-residential construction PPI has been fairly flat for the past two years after a significant drop in 2015. Year on year percentage has been positive for two months after 24 months of declines, (Figure 7).

Table 1 presents construction steels and competing materials referencing 3, 6, 12 and 24 months ago. The PPI for hot rolled structural steel shapes was down 3.2% y/y ending December, while pipe and tube including hollow structural shapes (HSS) was up 9.0% over the same time-frame. Compared to 3 months ago, structural steel shapes was down 0.6% as HSS declined by 4.1%.

Fabricators making structural steel parts for non-residential construction projects have been able to increase prices in each of the last four time references. This has not been the case for fabricators that produce steel bridge components. These fabricators have seen prices decline for each of the four time-frame comparisons. Meanwhile pre-stressed concrete bridge beams have seen strong price increases indicating a strong demand for this product. The resultant differential with bridge structural steel should translate into a cost advantage for steel. Wood and ready-mix concrete have enjoyed steady price increases as demand for housing continues to recover. However, the most recent 3 month time comparison are much smaller; +0.5% for ready-mix and down 2.1% for softwood lumber. Asphalt paving mixture has seen price declines due to the decline in petroleum pricing. For the 6 month comparison asphalt and tar paving mixtures have witnessed a price decline of 12.1%.

Figure 8 presents the PPI of hot rolled bars from 2010 to present. The price fell throughout 2015 before cycling up and back down in 2016. The index has now been up for two months in a row, however on a 12 month y/y percentage basis, it has recorded negative values for 24 consecutive months. The good news is that the month over month decline is moderating.

Figure 6

Figure 7

U.S. and Canadian Service Center Shipments: December U.S. service center total shipments continued to decline falling 3.1% on a three month moving average basis, (3MMA) y/y and were down 14.4%, 3MMA compared to two years ago. Pipe and tube shipments fell the most, down 13.4%, while sheet products were flat y/y, but down 10.5% vs. two years ago (Table 2). Overall inventories fell across the board (-14.1% for all products), except for structurals which posted a 3.8% increase 3MMA y/y. Overall intake was up 2.3% with a mixed bag across the product lines ranging from up 6.8% for pipe & tube to down 4.8% for bar and shapes.

Canadian September service centers total shipments increased by 4.5%, 3MMA y/y but remain down 14.6% compared to two years ago. Shipments were higher across all product groups led by bar & shapes which swelled 34.1% 3MMA y/y and posted stronger numbers than both two and three years ago. All other product groups recorded increases ranging from +1.1% for sheet to +4.7% for pipe and tube, (Table 3).

Overall inventories levels were essentially flat 3MMA y/y, off -0.3%. Bar and shapes were up 9.5% and sheet was up 2.4%, 3MMA y/y. All other product groups recorded declines. Overall intake on all carbon products surged by 31.0%, 3MMA led by a 41.4% spike from bar & shapes and a 49.7% jump from sheet products. Pipe & tube was the only product group to post a decline in intake, off 2.1%, 3MMA y/y.

Table 2

Contributors this week include; Peter Wright and Steve Murphy