Weekly Market Update - October 20, 2016

US Architectural Billings Index (ABI): The American Institute of Architects (AIA) reported a rare two month downturn with their October 19, 2016 billings index report. This leading economic indicator for activity in the construction industry, provides a nine to twelve month forward look from the billing of architectural services, to breaking ground on a project. Any ABI score above 50 indicates an increase in services billed, reciprocally a score below 50 indicates weakened billings. September’s billing score fell for a second month to 48.4. Concerned that a consecutive monthly decline has not occurred since the 2nd quarter of 2012 (Figure 1), AIA Chief Economist, Kermit Baker, Hon. AIA, PhD expressed, “This recent backslide should act as a warning signal.” He also pointed out that, the drop-off in demand could be continued hesitancy to move forward on projects until after the presidential election. Currently new work is  coming in slowly, however as indicated by the strong new project inquiries for September (59.4), Mr. Baker was confident billings will resume growth in the coming months.

Table 1 tracks the three month moving average (3MMA) of these indexes to smooth out the volatility in month to month data. With two consecutive months of declining national billings, the index had a 3MMA of 49.9, a year over year decline of 5% when compared to the 52.2, 3MMA posted for the 3rd quarter of 2015. The three month moving averages for the design contract index (51.9) and inquiries (59.6) were both positive in September, but were down 4.4% and 4.2% respectively, when compared to Q3 2015. Billing indexes for institutional construction fell 6.5% y/y, while the commercial / industrial index, fell 2.1% y/y. The September 3MMA index for multi-family residential rose 1.1% y/y, slightly stronger billings than recorded in Q3 2015, (Figure 2).

Figure 1

US and Canadian Service Center Shipments: September service center total shipments continued to decline falling 7.0% on a three month moving average basis. (3MMA) y/y and down 15.6%, 3MMA compared to two years ago. Plate and Bar shipments fell the most, down 23.2% and 18.3% y/y respectively. Sheet products performed comparatively better, down 2.5% y/y, (Table 2). Overall inventories fell across the board except for a slight increase structurals (+0.4%), 3MMA y/y. Intake was also down in every product group category. Once again plate and bar declined the most, off 18.7% and 19.2%, 3MMA y/y respectively.

A slowing manufacturing base, trade actions, weak energy prices and a pause in the non-residential construction sector coupled with short mill lead times have combined to reduce service center shipments, inventory and intake volumes.

Canadian September service centers total shipments declined 10.6%, 3MMA y/y. Bar & shapes shipments increased 11.1%, all other product groups recorded declines, (Table 3).

Overall inventories levels fell 16.7%, 3MMA y/y with the exception of bar & shapes which rose 4.7%. Intake on all carbon products increased 6.4%, 3MMA led by a 28.0% surge from bar & shapes and a 7.4% bump from sheet. Pipe & tube was the lone product group to record a decline in intake, off 5.2%, 3MMA y/y.

Table 2

U.S. Manufacturing Capacity Utilization: The 3MMA of capacity utilization fell to 74.99%, right on the threshold of the recession line by historic standards. The index has drifted lower since reaching its short term peak of 76.26% on November 2014, (Figure 3). Manufacturing other than automotive continues to struggle against the headwinds of; low energy prices, a strong dollar which hurts exports and high import levels of semi and finished manufactured goods.

Figure 4 examines capacity utilization vs imports of carbon steel. Prior to the end of the recession these two variables had a weak relationship (correlation coefficient of 0.49). After the recession ended the relationship strengthened considerably (correlation coefficient of 0.81). We think this is because in the 2003 to 2009 timeframe, global capacity utilization was high (hitting 90% for a brief period), and steel was being consumed in its home markets. After the recession ended global capacity utilization waned (currently 70%), while at the same time more and more steelmaking capacity was being added especially in China. Much of this excess capacity was exported.

In Figure 5, we overlay MSCI carbon steel shipments onto manufacturing capacity utilization. The correlation coefficient of 0.72 illustrates that there is a fairly strong relationship between the two data sets. The relationship began to diverge after the recession ended and has begun to widen further in 2015 and 2016 (correlation coefficient measures -0.11 from 2013 to present). There are many factors that contribute to this change. We think the main influences are direct imports to end-user and fast availability of product from steel mills as a result of low mill capacity utilization which equates to short mill leads times.

Figure 3

Figure 4

Oil and Gas Prices and Rotary Rig Counts. October 2016: On October 14th had this to say; oil prices surged in the first week of October following OPEC’s announcement in late September that it stands ready to cut output in an effort to boost prices. Following an extraordinary session on September 28, OPEC members agreed on a production target ranging from 32.5 million to 33 million barrels per day. OPEC said it will cut up to 750,000 barrels per day from current output levels to reach that goal. According to Bloomberg estimates, OPEC crude oil output averaged 33.75 mbd in September, up from 33.58 mbd in the previous month and a record high for the 14-member oil cartel. Thus the price of West Texas Intermediate crude topped $50 per barrel in early October for the first time since June. Oil prices got an additional boost on October 10 after Saudi Arabia’s energy minister said $60 per barrel oil was not unthinkable before year's end. Saudi Arabia remains by far the single most influential oil producer in the market. Any potential OPEC agreement will require Saudi Arabia to make the largest production cut of any OPEC member.

Figure 6 shows historical oil and gas prices since January 2000. The daily spot price of West Texas Intermediate, (WTI) rose through $40 on April 11th and remained in the $40s except for 3 days in June, the 7th through the 9th when it broke through the $50 level and one day, August 2nd when it dipped to $39.50. On October 5th WTI once again broke through $50 and closed at $50.72 on the 11th according to the Energy Information Administration, (EIA). Brent closed at $50.48 on the same day.

The price of natural gas, delivered the Henry Hub in Louisiana closed at $2.91 / MM BTU on October 7th, up from $1.57 on March 4th. October 7th was the latest data published by the EIA. The price had trended down for two years prior to March 14th and was below $2.00 in March and April therefore the turnaround since then is encouraging. Natural gas is expected to fuel the largest share of electricity generation in 2016 at 33%, compared with 32% for coal and in 2017, natural gas and coal are both forecast to fuel 32%.

The total number of operating rigs in the US and Canada on October 7th was 687, up from a low of 445 on May 27th. In that time frame the oil rig count was up from 330 to 515 and the gas count was up from 115 to 172. Figure 7 shows the Baker Hughes US Rotary Rig Counts for oil and gas equipment in the US through October 7th. (Explanation below). The uptick in the US oil rig count was the first since August of last year and now seems to be well established having increased from 316 on May 27th to 428 on October 7th. Based on the most recent available data, the EIA estimates that oil production from hydraulically fractured wells now makes up about half of total U.S. crude oil production.

The gas rig count in the US fell rapidly in 2015and broke through the 200 level on September 11th. After a few months of relative stability the decline re-commenced in late December 2015 and bottomed out at 82 on June 3rd. Since then there has been a small recovery to 94 on October 7th.

On a regional basis in the US, the big three states for operating rigs are Texas, Oklahoma and North Dakota. Texas at 246 on October 7th was up from a low point of 173 on June 20th but still down from 318 at the beginning of the year. Oklahoma at 70 on October 7th was up from its low point of 54 on June 24th but down from 87 at the beginning of the year. North Dakota at 30 on October 7th was up from its low point of 22 on June 3rd but down from 53 at the beginning of the year.

Figure 6

Figure 7

U.S. Industrial Production: 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 8). The three month moving average, (3MMA) came in at 104.37 in September flat with August. Year on year percentage change was a negative 1.0%. The y/y change has now been negative for 13 consecutive months indicating a manufacturing economy that continues to struggle. The manufacturing sector lost 47,000 jobs over the last year, 29,000 of these occurred in August and September. On a positive note, the downward spiral of job-loss in the natural resources and mining sector has finally stabilized with oil prices are trending higher. In addition, the ISM manufacturing index surged 5.7 points to 57.1 in September, which was far better than analyst’s expectation and a hopeful sign heading into 2017.

Figure 8

Steel Demand Indicators: Table 4 is a snapshot of the market situation on 10/20/2016. Indicators updated since we last published two weeks ago are shaded beige. In most cases this is not September / October data but data that was released in those months for previous months, the actual month to which the data relates is shown in the second column. Of the 27 indicators under consideration, the present situation of 6 are positive by historical standards, 10 are negative and 11 are neutral. There was an increase of one negative and a decrease of one neutral since our last update on October 6th. Our intent in using the word neutral is to say that this indicator is considered to be in the mid-range of historical data. The change that occurred in the last month was as follows. We re-classified the rebar import price from neutral to negative as it fell below $320 / net ton CIF Houston on October 17th. There were no other changes to our view of the present situation.

In our trends analysis, most of the values reported are three month moving averages to avoid the knee jerk reactions that are characteristic of most economic reports in the press. Please note that there is nothing subjective about this trends analysis. The numbers presented here are the facts available as of October 20th 2016. The number of indicators trending positive in this latest analysis was 10 with 17 trending negative. This was a net increase of four negatives since October 6th and is the largest negative shift that we can remember since starting this analysis almost seven years ago.

In the general economy, all indicators except the broad index value of the US $ are trending positive. This was a trend change for the dollar which had been weakening in our last update. All indicators in the long product section are trending negative, the changes from our last update were that scrap exports and service center inventories reversed course and increased, both of which we regard as negative trends. In the construction section the PPI of commodities declined in the September data. We regard rising commodity prices as a positive for industrial construction and vice versa. There were no changes in trends for the manufacturing section.

We have separated the leading indicators from the main table for a closer look, these are shown in Table 5. Of the twelve leading indicators six are trending positive, and six negative. This was a move of three from positive to negative since our last update.

In summary the present situation is historically weak and deteriorated slightly in this update. Trends have weakened in the last seven months and this tendency accelerated in the September / October data. At the end of September 51.9% of indicators were trending positive and 48.1% negative. Currently 63% of indicators are trending negative. This is the worst trend result since January 2010.
(Explanation of Indicators).

Table 4

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