Thursday
May212015

Weekly Market Update - May 21, 2015

US MSCI Report: The three month moving average (3MMA) daily shipment rate for all carbon long products was down 6.6% y/y in April after declining 1.72% y/y in March. Bar and shapes <3” posted the weakest shipments, down 9.6% y/y, followed by sheet, off 7.3% y/y. Daily intake 3MMA plummeted 11.6% y/y as all product groups recorded sharp declines. Sheet recorded a 13.2% decline, while bar & shapes posted a 13.1% deline. Structurals were off 7.7% y/y and plate was down 6.9% y/y. Overall monthly inventory levels grew by 9.8% y/y to achieve a 2.73 months on hand (MOH), still high compared to its 2.49, 36 month average. Carbon plate posted the largest increase, up 24.2%, 3MMA y/y, pushing MOH up to 3.35. Structurals also posted a significant increase, up 12.2% y/y, bringing its MOH to 2.77, (Table 1). We now have enhanced detail to report from MSCI as shown in Table 1, Structural data is broken out into two categories; Wide Flange Beams and Other Structural Shapes which are predominately angles and channel sections greater than or equal to 3 inches. Bar and Shapes less than 3 inches are sub-divided into: Alloy, Cold Finish, Carbon Bars and SBQ Bars. Fig. 1 illustrates structural daily shipments and month ending inventory breaking out WFB and other shapes. Fig. 2 presents Bar and Shapes breaking out shipments and month ending inventory for the four sub-categories to include Carbon Bar, Ally bar, Cold Finished bar and SBQ bar. Note the new sub-category data is only available from 2013 and shipments are represented as 3MMA.

Table 1

Canadian MSCI Report: Overall daily 3MMA shipments from Canadian service centers fell by 6.9% y/y ending April. All product categories posted declines in April y/y. Structurals recorded the largest decline, off 13.3%, followed by plate, down 10.6% y/y. Shipments are also down compared to two and three years ago. Overall daily 3MMA intake fell 3.9% y/y, influenced by a 23.3% drop in plate intake and a 17.7% reduction in structurals intake. Sheet was the only product to record an increase, up 8.4% 3MMA y/y. Monthly overall inventory levels surged by 23.2% y/y to 3.87 MOH, influenced by a 36.9% jump in sheet. For reference the 36 month average MOH equals 3.31, (Table 2).

We now have enhanced detail to report from MSCI as shown in Table 2, Structural data is broken out into two categories; Wide Flange Beams and Other Structural Shapes which are predominately angles and channel sections greater than or equal to 3 inches. Bar and Shapes less than 3 inches are sub-divided into: Alloy, Cold Finish, Carbon Bars and SBQ Bars. Fig. 3 illustrates structural daily shipments and month ending inventory breaking out WFB and other shapes. Fig 4 presents Bar and Shapes breaking out shipments and month ending inventory for the four sub-categories to include Carbon Bar, Ally bar, Cold Finished bar and SBQ bar. Note the new sub-category data is only available from 2013 and shipments are represented as 3MMA.

Table 2

Architectural Billings Index: As a leading economic indicator of construction activity, the April billing index as reported by the American Institute of Architects fell to 48.8, dipping below 50.0 for a second month this year, (Fig. 5, Table 3). Any score above 50 indicates an increase in billings, and reciprocally any score below 50 means a declining demand for architectural services. The design contracts (53.1) portion of the index rose 1.6% y/y, while inquiries for new projects (60.1) rose 2.4% from one year ago. AIA Chief Economist Kermit Baker, Hon. AIA, PhD was quoted saying, “The fundamentals in the design and construction industry remain very healthy. The fact that both inquires for new projects and new design contracts continued to accelerate at a healthy pace in April points to strong underlying demand for design activity.”

Calculated on a 3-month moving average and broken down by region, the South and Western sectors showed growth as regional business conditions continued to thrive. Dr. Baker also added, “April would typically be a month where these projects would be in full swing, but a severe winter in many parts of the Northeast and Midwest has apparently delayed progress on projects.” This is reiterated in the ABI for the Northeast & Midwest regions where indexes were 43.2 and 49.9, respectively. The ABI construction sector sub-indexes reported: Multi-family residential (49.9), commercial/institutional (53.2), and Institutional index (53.2).

Fig 5

Scrap Price Benchmarks: There are three benchmarks that we use in this report to monitor the price of scrap. These are the IODEX price of iron ore delivered North China, the value of the US $ and the price of oil in Cushing Oklahoma. The price of ore and the value of the US $ have a direct effect on scrap prices. There is not a causal relationship between scrap and oil but they are both global commodities with a highly correlated price ratio. This has enabled us to signal whether the price of scrap is out of line either on the up or down side. The price of Chicago shredded had a recent peak of $438 in January 2014, declined to $325 in December 2014, took the normal January uptick to $334, crashed by $89 in February, declined a further $10 in March which it re-gained in May after April was unchanged. Fig. 6 shows the IODEX, (62% Fe delivered N. China) and the price of scrap through May 18th. The correlation since January 2006 has been 0.8034. This relationship became de-coupled in 2010 and 2011 when the big three ore cartel began to eliminate long term contracts. We see a similar decoupling in the other direction today caused by the oversupply of ore. In the long term, Chicago shredded has been 3.3 times as expensive as the IODEX with quite a wide spread in each direction. For four years through December 2013 scrap was advantageously priced on a historical basis compared to ore. Throughout 2014 scrap became increasingly uncompetitive and today the ratio is 4.0, (Fig. 7). This gives a competitive advantage to those long product manufacturers overseas who are blast furnace based, China in particular. At present the supply of ore far exceeds demand and stocks at 41 major Chinese ports were at a 19 month low last week. Fig. 8 shows the scrap / US $ relationship which has a 0.8718 negative correlation since January 2002. An appreciating $ has a negative influence on the price of global commodities, of which scrap is one. Fig. 9 shows the scrap / oil relationship through May 18th with a correlation of 0.9269 since January 2000 and 0.9382 in the 25 years since January 1990. It was clear in December last year that if history was a guide, scrap was headed for a fall and this occurred in February. Based on these three benchmarks we conclude that there is little incentive for the price of scrap to move much in either direction in the next couple of months.

Fig 6

Housing Permits and Starts through April 2015: The monthly Census Department results for residential construction are seasonally adjusted and annualized. Housing starts surprised on the upside in April. Total starts were 1,135,000 up from 944,000 in March. Single family were up by 16% and multifamily by 27%. Three month averages, (3MMA) give a different picture. On that basis, single family at 993,000 were up by only 2% and multifamily at 339,000 were up by 3%. Fig. 10 shows the 3MMA of total housing starts projected through 2018. This projection is probably optimistic as the trajectory for the last two years only gets us to 1.3 million. The year over year growth rate of the 3MMA of total starts in February was 7.4%, in March it was 4.4% and in April it was only 0.9%.

Multifamily starts are now beyond the pre-recession high of February 2006 but the growth of starts in this sector has slowed dramatically from a 3MMA year over year rate of 35.5% in August to 1.9% in March then to negative 4.1% in April, (Fig. 11). If we ignore the growth spurt of mid-2014, this sector has been slowing since early 2012 and may be approaching saturation.

Permit data is useful as a forward look at starts. If permits exceed starts then we anticipate an acceleration in construction starts and vice versa. Table 4 shows total permits and starts nationally and regionally. The differential between permits and starts for single and multi-family units is suggesting that the shift in consumer’s preference towards apartments is far from over. In April on a 3MMA basis, permits of multi-family exceeded starts by 109,000 in contrast to the negative 9,000 for single family. The implication is that apartment construction is poised to surge strongly and that single family construction will slow slightly. The homeownership rate in Q1 this year which is the ratio between ownership and rental at 63.7% was the lowest since 1990. Rental vacancies are at historic lows and rents are soaring.

Fig 10

CFNAI: The Chicago Fed National Activity Index is a weighted measure of 85 economic indicators that gauge economic activity and inflationary pressures (Federal Reserve Bank of Chicago). The indicators are derived from production and income, employment, unemployment and hours, personal consumption and housing, and sales, orders, and inventories. The Index has a value of 0 and standard deviation of 1, with a positive reading signaling above average growth and negative reading signaling below average growth.

The Index reading in April fell for the fourth straight month from -0.36 in March to -0.15. The CFNAI hasn’t had four consecutive months of below trend growth since Q2-Q3 2010, (Fig. 12). The indicator CFNAI-MA3 is a three month moving average that reduces volatility in the CFNAI headline reading. The reading for April was -0.23, up slightly from March but still negative, showing below trend growth. This indicator has been negative for three straight months. Production and Income has been below trend for five straight months while Employment, Unemployment, and Hours rose to above trend after March’s first below trend reading in nearly two years. Sales, Orders, and Inventories came in at 0, at trend growth, declining for the third straight month. As expected, Personal Consumption and Housing has yet again recorded a negative reading, 100 consecutive months of below trend growth, with the last above average reading coming in December 2006, (Fig. 13). Since GDP equals consumer spending plus investments plus net exports plus government spending, this reading depresses potential GDP growth.

The CFNAI is a leading indicator for steel consumption and historically there has been a firm relationship between the CFNAI index and steel supply up to the start of the recession. The CFNAI experienced a healthier recovery than “Long Product” steel supply. The construction sector has yet to experience the growth typically seen in the recovery after a recession; however, the gap seems to be closing, more than five years after the recovery began.

Fig 12

Unemployment Claims: New unemployment claims rose to 274,000 for the week ending May 16th, 10,000 claims higher than the previous week. This figure has been lower than the 300k benchmark for the eleventh straight week, (Fig. 14). The four week moving average is 266,250, 18% lower, more than 56,000 claims, on a y/y basis. This figure irons out weekly volatility in reporting. The 4WMA is at the lowest value it’s been since April 2000. This is another sign that the labor market has been getting stronger as the economy gets out of the Q1 funk.

Seasonally adjusted continuing claims fell for the fourth straight week to 2,211,000, 17% lower than a year ago, (Fig. 15). The four week moving average of 2,229,750 is the lowest since February 2007 and has stayed below the 3 million benchmark since July 2013. Continuing claims have recovered 68% since the end of the recession in June 2009. The number of persons claiming any type of unemployment benefit has also fallen from the previous week, from 2,254,647 to 2,195,714. This figure has dropped nearly 425,000 persons on a y/y basis.

Fig 14

US Raw Steel Capacity Utilization bounced back to 72.1% for the week ending May 16th to 1.705 million tons, up 1.7% w/w. Volume is down 8.3% over the last four weeks vs. the same period a year ago as high levels of imported steel coupled with a soft patch in demand continues to impact domestic production, Fig. 16. Regional values and YTD y/y change are presented in Fig. 17. The Western region reported the lowest YTD y/y change off 0.9%, the Great Lake region down 1.3% and the Northeast down by 2.9%. The Southern region posted the largest change, down 11.5% YTD y/y, followed closely by the Midwest region, down 10.5%.

Fig 17

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