Weekly Market Update - July 23, 2015

Global Scrap Trade through Q1 2015: This data published by the Iron and Steel Statistics Bureau, (ISSB) is not very current because some nations are slow to report but we still believe it gives a valuable perspective of global trends. The total volume of ferrous scrap traded between nations was the lowest for six years in Q1 2015 with the US taking the brunt of that decrease, (Fig. 1). We attribute the US situation to both a decline in actual global commerce and the strengthening of the US $ which has caused the US share to decline from 24.2% in 2011 to 17% in the four quarters through Q1 2015. Turkey the largest scrap buyer has seen its share of total global purchases increase from 18.9% in 2011 to 19.7% in the last four quarters but its tonnage volume has decreased from 19 million in 2011 to 17.6 million. In the same time frame Turkish buys of semi-finished billets and slabs has increased from 2.2 million to 5.9 million tonnes. The US has seen a 50% decline in shipments to Turkey in the last 3 years as the EU has held its own and Russia has increased, (Fig. 2). Scrap imports into China have been declining for the last four years and into Korea for the last three years. These declines are partly due to the development of their own domestic scrap recycling industries, (Fig. 3).

Fig 1

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 advanced by $30 in June and gave back $10 in July. Fig. 4 shows the IODEX, (62% Fe delivered N. China) and the price of scrap through July 10th. The correlation since January 2006 has been 0.8054. In the period 2007 through 2009 the correlation was 91.82 but the relationship became de-coupled in 2010 and 2011 when the big 3 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 5.4, (Fig. 5). This gives a competitive advantage to those long product manufacturers overseas who are blast furnace based, China in particular. Fig. 6 shows the scrap / US $ relationship which has a 0.87032 negative correlation since January 2002. An appreciating $ has a negative influence on the price of global commodities, of which scrap is one. Fig. 7 shows the scrap / oil relationship through July 13th with a correlation of 0.9264 since January 2000 and 0.9346 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. The relationship came back in line in April but since then the price of scrap has been out of line on the high side.

Fig 4

Fig 5

US Scrap Exports totaled 1.30 million metric tons (mmt) in May, up 12% m/m. Year to date through May, the US has exported 5.73 million tons of scrap, down 10% y/y compared to the first five months of 2013. Fig. 8 presents historic shipments by monthly average from 2002 through 2014 and then switches to monthly actual for 2015. It also shows consumption by the top individual importing countries as well as a pie chart of the top four importing regions. Total US scrap exports are denoted by the thick black line read on the right-hand Y axis. Turkey continues to be the perennial top importer of US albeit its present demand is roughly one half its peak demand realized purchased in 2011.

Fig. 9 shows the history of the top four importing countries. Both China and South Korea have significantly reduced imports of scrap from the US. Aggregate US exports have now returned to 2006 levels, roughly one half of peak demand level. Fig. 10 shows US exports by product. Thirty-three percent of YTD exports were heavy melting scrap, followed by shredded scrap comprising 30% of the US export market.

Fig 8

China Steel Production & Exports: China’s crude steel production, as reported by China Metals Weekly, rose to 70 million tonnes (Mt) in the month of May, and totaled 340 Mt year to date, resulting in decrease of 1.6% y/y. Output of Iron Ore totaled more than a half a billion tonnes in the first five months of the year, down 11.2% from the 566 Mt produced through May 2014. As domestic production of ore decreased, so did imports, importing 378 Mt YTD. Late spring steel production cuts were implemented at most mills, necessitated by ever increasing stock supplies wrought by soft domestic demand. Lower steel demand dictates lower demand for Iron Ore.

Output of finished steel products totaled 98.5 Mt for the month of May, up 2.4% m/m and totaled 460 Mt YTD, a 2.2% y/y increase, (Fig. 11). China’s long product output totaled 203.4 Mt in the five months through May 2015, falling 2.5% y/y. Broken down by segment, rebar comprised 40% of China’s long product output, (Fig. 12). Less than 1% of rebar tonnage produced was exported to globally. Wire rod comprised 30% of long product output, of which 7.8% was exported. Year to date China committed 9.5% of their finished steel production to global exportation.

As domestic demand waned, mills increased exportation of the resultant excess capacity sometimes below domestic pricing. Chinese global finished steel exports totaled 9.2 Mt for the month of May, (Fig. 13). Year to date 43.6 Mt were exported, a y/y increase of 37.8%. Of those exports, May shipments to the US as reported by S.I.M.A., totaled 274,000 tons and comprised 3% of the 9.2 Mt exported globally. Year to date China has exported 1.21 Mt of steel to the United States, a y/y increase of 3.2%.

Fig 11

Fig 12

Architectural Billings Index (ABI): The national ABI surged 3.8 points m/m in May to 55.7 as demand for architectural design services rebounded nicely over the past two months after dipping below the 50 threshold in April (> 50 = expanding billings revenue, <50 = declining billings revenue), (Fig. 14). Demand for institutional design services was strong, posting a sub-index value of 59.1 up from 56.3 the prior month and far stronger than the commercial/industrial sub-index of 51.6. Increased demand for education facilitates, healthcare and government buildings is driving the institutional sub-index, (Fig. 15). The AIA reports that demand for new apartments and condominiums may have peaked since the index has recorded successively recorded lower values each month this year and is now down to 2011 levels.

Regionally, design activity is strongest in the Midwest (57.2) and south (54.9). The West (50.7) and the Northeast (50.4) are showing weaker demand, yet continue to stay in expansionary territory.

Fig 14

The Chicago Fed National Activity Index: The CFNAI 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, (Fig. 16).

The Index reading in June turned positive after five consecutive months of below trend results. June’s reading was 0.08, up from May’s -0.08 results. The indicator CFNAI-MA3 is a three month moving average that reduces volatility in the CFNAI headline reading. The reading for June was -0.01, just slightly below historical trend; however, this is also the fifth month of below trend results. The CFNAI-MA3 hasn’t recorded five straight months of below trend growth since Q2-Q3 2012. Employment, unemployment and hours, and sales, orders, and inventories experienced above trend growth in June. Production and income officially rose to -0.01 from -0.08 in May, however, was still below trend growth for the last three months. As expected, personal consumption and housing had recorded a negative reading, 102 successive months of below trend growth, with the most recent above average reading recorded in December 2006. 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, as the relationship between these two indicators began to fade. The construction sector has yet to experience the growth typically seen in the recovery after a recession; however, the gap appeared to close until 2015, as steel supply seems to be hovering around the 7 million ton mark, (Fig. 17).

Fig 16

Fig 17

Unemployment Claims: New unemployment claims fell to 255,000 for the week ending July 18th, 26,000 claims lower than the previous week, (Fig. 18). This figure has been below the 300k benchmark for 20 consecutive weeks. The four week moving average totaled 278,500, falling more than 7% y/y. This figure irons out weekly volatility in reporting. The 4WMA, since the beginning of May, has been among the lowest values since Q2 2000. This is another sign that the labor market may be strengthening.

Seasonally adjusted continuing claims fell for the second week, after a series of increases during June, (Fig. 19). The figure for the week of July 11th was 2,207,000, 12% lower than a year ago. The four week moving average came in at 2,253,750; under the 3 million benchmark for two years. This was another signal of a tightening labor market. Continuing claims recovered 68% since the end of the recession, more than six years ago. The number of persons claiming any type of unemployment benefit rose this week to 2.28 million from 2.18 million, however, has fallen nearly 400k persons on a y/y basis.

Fig 18

Steel Demand Indicators: Table 1 is a snapshot of the market situation on 7/23/2015. Indicators updated since we last published two weeks ago are shaded beige. The latest month or quarter for which data is available is identified in the 2nd column. Of the 26 indicators under consideration, the present situation of 7 are positive by historical standards, 8 are negative and 11 are neutral. This was no change since we last published on July 9th. Looking at the 12 leading indicators separately, 3 were negative 7 were neutral and 2 were positive which is proportionately about the same as the total 26.

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 latest facts available. Overall there was no change in the number of indicators trending positive and negative compared to two weeks ago but there were changes in the detail. Chicago shredded reversed ground and experienced a $10 decline in July which we regard as a negative. In June this material had advanced by $30. Net imports moved in the opposite direction having had a negative trend in the April data and changing to positive in May. There were no other changes in the direction of trends. There has been a significant deterioration in the direction of trends since August last year when 85.2% of the 26 indicators were trending positive. This has declined to 61.5% as of today’s date. An examination of the leading indicators shows a different distribution of positive and negative. Looked at this way, of the 12 leading indicators, 5 are trending positive, 1 was unchanged and 6 are trending negative. Since more of the leading indicators are trending negative than are trending positive this analysis points to a slowing market. The distribution of leading trends was unchanged since our July 9th report and there were no changes to the detail. (Explanation of Indicators).

Table 1

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