Weekly Market Update July 24, 2014

U.S. MSCI Report: The three month moving average (3MMA) daily shipment rate for all carbon long products was up 7.2% y/y June. The percentage 3MMA y/y change has been positive for five consecutive months. Sheet and plate showed the best performance, up 7.9% and 7.8% y/y respectably. Structurals reported the weakest shipments, up 3.8% y/y. Daily intake 3MMA surged by 15.9% y/y for all carbon steel products influenced by a 18.6% jump in sheet. Pipe & Tube recorded the lowest growth at +8.5% y/y. Overall monthly inventory levels grew by 6.9% y/y to 2.28 months on hand. Structurals posted the largest increase, up 11.8%, while sheet inventory increased by 9.7%. Pipe & tube inventory levels fell by 2.3% y/y, (Table 1). Inventory levels were down 6.6% vs. the same timeframe two years ago. Every product inventory level was lower than they were two years ago except structurals which increased by 6.2% over the past 24 months. Fig. 1 presents daily shipment levels and the percentage y/y change since the year 2000. Overall shipments of carbon steel hit 170,630 TPD in June, well up from the recession low of 112,000 TPD, but still a long way from the 213,000 TPD average level enjoyed during the 2004 to 2008 “boom” period.

Table 1

Canadian MSCI Report: Overall daily 3MMA shipments from Canadian service centers were up 1.0% y/y and down 8.8% vs. two years ago. Bar and shapes were up 4.2%, while pipe & tube was down 3.8%. Daily 3MMA shipment intake surged 14.6% y/y, led by a 30.2% leap in sheet. Monthly overall inventory levels dropped by 6.7% y/y to 2.88 MoH, strongly influenced by a 19.4% reduction in sheet. Structurals on the other hand posted an 18.4% rise to 3.07 MoH, (Table 2). After rising steadily since the recession, daily shipment levels fell throughout most of 2012, (Fig. 2). Shipment levels were more or less flat throughout 2013 and thus far in 2014. In percentage terms, June was the first positive move (+1.76%, 3MMA y/y), over the last 16 months.

Table 2

Non-Residential Starts (Dodge): Starts in square-footage (a start includes the total square feet for the project in the month the project commenced) rose 10.3% y/y to 1,105.9 million for the 12 months ending June 2014. Momentum was positive 2.1% and there was growth in most project categories three months y/y, (Table 3), led by a 53.9% surge in hotel/motel and a 43.3% bump in offices and banks. Warehouse construction also performed well, up 42.1%, three months y/y. Laggards include: retail (-16.7%), medical (-9.5%), recreational (-6.0%) and parking garages (-2.5%).

Table 3

Architecture Billings Index released today is signaling improving conditions for the overall design and construction industry. The national ABI score recorded a 53.5 score in June, up almost a full point m/m. Recall that a score greater than 50 reflects an increase in design activity. Examining the regional scores shows increasing strength in the Midwest (56.3), South (53.9), and Northeast (51.1). The West fell below the 50 threshold posting 48.7 in June. The commercial / industrial sub-index posted 53.1, while the institutional index recorded its first positive value (50.2), since the summer of 2013, (Fig. 3).

Fig 3

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 June fell slightly to 0.12, from 0.16 in May. 2014 figures have been above 0 for the fifth straight month thanks in part to monthly revisions. The indicator CFNAI-MA3 is a three month moving average that reduces volatility in the CFNAI headline reading. The reading for June was 0.13, down sharply from May’s adjusted reading of 0.28, indicating that the economy was growing above historical trend. All figures were at or above trend in June except for Personal Consumption and Housing, which has exceeded seven consecutive years of below trend growth. Recent data releases involving increased employment and decreased unemployment claims contributed to the positive reading. The last above average reading was in December 2006, (Fig. 4). 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, (Fig. 5).

Fig 4


Fig 5

U.S. Industrial Production: The Industrial Production Index measures the monthly output from four industries: mining, manufacturing, gas, and electric. Its baseline is 2002 = 100. The seasonally adjusted figure for June was 103.9152, the highest on record dating back to 1993. The Index rose 4.3% y/y and had been above 100 for the tenth consecutive month. The three month moving average was 103.6, also the highest figure on record. June’s reading is up 24.4% since June, 2009 the lowest measure and last month during the Great Recession.

As industrial production has recovered and seeing all-time highs, total steel supply has yet to make a comeback from the depths of the recession and is still well below the monthly averages seen before the onset of the crisis. It is probable that as the construction and manufacturing industries continue to expand throughout 2014, total steel supply will follow suit. Historically there has been a 70% correlation between the two data sets, (Fig. 6).

Fig 6

Regional job creation: The individual states report job creation independently of the Bureau of Labor Statistics. The national total from both sources is in good agreement. In 30 months, (10 quarters) since Q1 2012 the total jobs created according to the BLS was 5,952,000, according to the sum of all individual state reports was 5,875,200 a difference of only 1.3%. However there is an enormous difference between regions in their job creation performance. As we consider how far the nation has progressed since the recession, total employment is one if the key criteria and at the national level more people are now employed than there were before the recession. This is not yet a cause for celebration because about seven million people have entered the employable population since 2008. Table 4 shows the net change in employment by region since Q1 2008 which was the pre-recession high. Of nine regions, only four have had a net gain in the number of people employed and only the South Central, (Texas, Louisiana, Arkansas and Oklahoma) can be said to have truly ‘recovered”. The two right hand columns of Table 4 shows the number of jobs gained by region since the bottom of the recession which was Q4 2009. Again there is a wide variation between regions ranging from a gain of 4.1% in the North East to 10.9% in the South Central. Clearly in any discussion of economic recovery it is insufficient to look only at the big picture.

Table 4

Steel Demand Indicators: Table 5 is a snapshot of the market situation on 07/24/14. We have been performing this analysis twice a month for over four years and this is the first time that there has not been a change in either the evaluation of the present situation or in the direction of trends. There has been a change in the magnitude of some trends that are worthy of note since we last published on July 10th. Service center shipments of long products which is the total of carbon bar and structurals continued to expand year over year but the expansion slowed from May to June. Nonresidential construction square footage of starts as reported by McGraw Hill / Dodge accelerated from a year over year gain of 7.1% in May to 12.4% in June. The statistics for residential starts reported by the Census Bureau for June were disappointing but surprisingly the year over year trend improved from a growth rate of 9.6% in May to 13.3% in June. Auto production in NAFTA improved from a year / year growth rate of 4.8% in May to 6.1% in June driven by strong sales in the US.

The latest month or quarter for which data is included is identified in the 2nd column. Indicators updated since last published are shaded beige. (Explanation of Indicators).

Table 5

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