Weekly Market Update - July 21, 2016

Architectural Billings Index: The national ABI score for June came in at 52.6, its fifth consecutive month greater than 50 (>50 = expanding billings, <50 = contracting billings). The commercial / industrial sub-index score was 50.3. Regional sub-indexes were: South (55.5), West (54.1), Northeast (51.8) and Midwest (48.2), (Figure 1). The residential sub-index shot-up to 57.9, an 8.4 point y/y jump indicating strong demand for residential housing in the coming year. The only item of concern on this month’s report was the dip in the design contract awards which fell slightly below the 50 threshold to 49.7, otherwise a very encouraging report.

Figure 1

Mill Shipments and Supply of Long Products: This report compares domestic mill shipments and total supply to the market and quantifies market direction by product. Sources are the American Iron and Steel Institute and the Department of Commerce.

Table 1 shows both apparent supply and mill shipments of long products, (shipments includes exports) side by side as a three month average through May for both 2015 and 2016, (y/y). Apparent supply is a proxy for market demand. Comparing these two time periods total supply to the market was down by 4.1% and shipments were down by 2.2%.

Apparent Supply is defined as domestic mill shipments to domestic locations plus imports. In the three months through May the average monthly supply of long products was 2.287 million tons, up by 3.7% from the period three months through February but down by 4.1% y/y. The short term improvement, (3 months) compared to the long term decline, (12 months) means that momentum is very positive. Table 2 shows the change in supply by product on this basis through May. Momentum was positive for all products except heavy structurals.

Figure 2 shows the long term supply picture for the individual long products since January 2006 as three month moving averages. All products except heavy structurals have trended down in the last 18 months.

Mill Shipments, which includes exports, averaged 1.866 million tons / month in the three months through May, down by 2.2% year on year but up by 6.1% compared to three months through February, (3m/3m). Table 3 shows shipments of individual long products. Shipments of all products improved 3m/3m but only rebar and heavy structurals improved y/y. Figure 3 puts the results for the five main products into the long term context since January 2006. Shipments of all products except heavy structurals were down since late 2014.

It is now well into July and the latest data we have for shipments and supply is for May. The AISI puts out weekly data for crude steel production the latest of which was week ending July 16th. This provides the most current data for steel mill activity. Weekly crude output had negative y/y growth from February 7th 2015 through February 20th 2016 on a four week moving average basis. In the latest 17 weeks there was only one week with negative y/y growth, (Figure 4). This together with the results of our key market indicators analysis suggests to us that for at least the next few months we will continue to see improvements in both supply and mill shipments.

Table 1

Figure 2

Figure 3

Homebuilder Confidence and Housing Starts: Homebuilder sentiment declined slightly in July as indicated by the National Home Builder Association’s (NAHB) composite housing market index which fell to 59 from 60 in June. The current value is exactly in line with the six-month average. Any number > 50 indicates expansion, (Figure 5). On a regional basis, sentiment in the West, Mid-West and North East improved as that in the South declined. Total housing starts in June were at an annual rate of 1,189,000 units which was up from 1,135,000 in May but down from 1,213,000 in June last year. The 3MMA in June was 1,160,000 which was up from 1,134,000 in May. The 3MMA has been range bound since last June between 1,131,000 and 1,167,000. The question continues to be; are total starts still on track to reach 1.4 million units annualized by the end of 2018, (Figure 6) or have they plateaued and going nowhere, which is the case if we only consider the 12 months.

Single family starts in June were at an annual rate of 778,000 with a 3MMA of 762,000. The 3MMA was up by 7.6% year over year but is still 57.3% below the peak of late 2005. June Multifamily, (apartments / condominiums) starts were at an annual rate of 411,000 units with a 3MMA of 397,000, down by 11.2% y/y, (Figure 7). It now looks as though we may be seeing a shift away from multifamily housing based on the results for 2016. The trajectory of single family and apartments > 4 units based on the trend of the 3MMA since 2010 are tracking to reach 900,000 and 500,000 by the end of 2018 respectively.

Figure 8 shows the regional situation for the 3MMA of total residential starts since January 2000. There is a significant difference between regions. Improvements in the Mid-West have been negated by a decline in the North East as the West and South are flat.

Figure 5

Figure 6

U.S. Metal Service Center Shipment, Inventory and Intake Report: Most metrics continued to fall for steel service centers as shipments, inventory and intake all drifted lower in MSCI’s June report. The exception was intake on structurals, which increased 9.3% on a 3MMA y/y comparison.

Service center steel shipments (flats + longs) are pacing 7.1% lower compared to the same period last year. In June, overall shipments fell by 4.9%, 3MMA y/y, as plate shipments fell the most, off 18.9%, followed closely by bar & shapes down 16.8%.

Inventories were reduced by 16.3%, 3MMA y/y. Once again plate fell the hardest, plummeting 51.6%, structurals fell the least, down 3.1%, Table 4. Inventory change has fallen for 13 consecutive months on a y/y basis, but has been increasing for 5 months on a m/m basis. Although there is a great deal of volatility from month to month, the trend lines show that Months on Hand (MOH) has been steadily rising for Structurals, while relatively flat for Bars. In June, the all product intake was down 1.4%, 3MMA y/y led down by a 29.6% decline in plate. Sheet intake fell by a modest 0.4%, 3MMA y/y.

Figure 9 charts carbon steel daily shipments from 2007 to present. The Y axis employs base 100 referencing the period between 2007 and 2008 as the peak shipment period and associating all subsequent postings to it. Both Bar (47%) and Structurals (53%) remain depressed. Bars are drifting lower, while structural are showing a slight upturn. Sheet is performing much better, currently shipping at 81% of its peak.

Table 4

Canadian Metal Service Center Shipment, Inventory and Intake Report: Canadian service center steel shipments (flats + longs) are pacing 7.8% lower compared to this period last year. In June, overall shipments fell by 11.9%, 3MMA y/y, (note MSCI no longer reports on structural steel), as pipe & tube shipments fell, 19.7%, plate was off by 16.8% and sheet shipments slipped 11.2%, 3MMA y/y.

Inventories plummeted 26.9% led downward by sheet, off 33.1% 3MMA y/y. Plate fell 20.4% 3MMA y/y as bar and shapes inventory fell 8.8% over the same timeframe, (Table 5).

Intake was a mixed bag with plate increasing by 20.3%, 3MMA, y/y, while all other product groups posted declines ranging from down 22.6% for pipe & tube to -8.5%, 3MMA y/y for sheet.

Figure 10 charts carbon steel daily shipments from 2007 to present. The Y axis employs base 100 referencing the period between 2007 and 2008 as the peak shipment period and associating all subsequent postings to it. Plate had performed well after the recession, surpassing the pre-recession highs through the end of 2014. It has since been falling and currently stands at 68.9% of peak market. Bar & shapes and sheet had rebounded into the 80% range after the recession ended (end of 2010/ start of 2011), but subsequently drifted lower and currently both stand at 59.5% of peak.

Table 5

Industrial Production rebounded in June, with output up 0.6% m/m. The second quarter as a whole fell 1% y/y. This was the third consecutive quarter on quarter decline. Figure 11 shows that in spite of last year’s declining production index, June’s 104.1 remains above pre-recession levels. Manufacturing output rose 0.4% m/m supported by production of motor vehicles. Manufactured goods other than motor vehicles and parts was unchanged in June.

Figure 11

Manufacturing Capacity Utilization rose 0.3% m/m. The utilization index continued to hover above the recession line, with US manufacturers operating at 75.07 of capacity in June, (Figure 12). Reviewing the Federal Reserves’ data on a 3MMA basis to smooth out monthly volatility and discern trends, the capacity utilization rate declined at a very gradual rate for 12 successive months. Increased output was attributed to incremental increases in durable goods, mining, and utility operating rate.

Manufacturing productivity during the first quarter rose 1.3% compared to the first quarter of 2015, as output per hour increased, (Figure 13). As a result of the increase in new hires, manufacturing employees worked fewer hours, down 0.7% in the first quarter. In June the Bureau of Labor Statistics reported 12.3 million people were employed in the US manufacturing industry, an increase of 0.1% m/m. Figure 14 overlays the current manufacturing labor force with US unemployment. Manufacturing employment has been flat over the last two years after a rapid rise post-recession. Productivity gains through automation and efficiency have also had a restraining effect on the need for additional labor.

Figure 12

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