Weekly Market Update - December 8, 2016

Long Products Supply and Mill Shipments (SMA): The overall long products, apparent domestic consumption (ADC = domestic shipments + imports), was down 1.0% on a 12 month y/y basis ending November, and down 5.6% growth on a 3 month y/y metric. This difference indicates a deterioration between the two periods as indicated by negative 4.6% momentum, (Table 1).

Light shapes recorded stronger growth on both 3 and 12 month y/y comparisons, +1.3% and 3.0% respectively. All other product groups posted negative growth on a 3 month y/y basis, however structurals showed improved performance on a 12 month y/y comparison, up 1.6%, while rebar was flat (0.0%).

Figure 1 presents a graph of all long product domestic shipments plus imports. Overall import market-share for the first 10 months of the year was 23.1%, up 0.7 points from the 22.4% level recorded through November of 2015. Import levels YTD varied considerably by product group ranging from a low of 10.5% for merchant products to a high of 39.6% for wire rod.

Examining mill shipments (domestic shipments + exports, bottom part of Table 1), all product groups posted declining growth rates on a 12 month y/y basis (except other light shapes and structural angles & channels), with an overall 2.5% decline. On a 3 month measure the all product group growth recorded declines (except structural angles & channels, +0.9%) with an overall decline of 6.5% y/y. This means that domestic share was negatively impacted as a result of higher import levels.

Table 1

Portland Cement Shipments: Total cement shipments fell by 3.7% on a 3 month y/y basis but were up 3.5% y/y over the year ending September 2016, leading to negative 7.2% momentum.

Figure 2 shows the three month total shipments along with the three month y/y change for the nine U.S. census regions. The center section of the country plus the Middle Atlantic all recorded negative growth 3 month y/y ending September. The region with the largest decline was the South Central at -12.5%, despite the percentage decline, this region remains the largest consumer of cement at 5,178,000 tons (3 month total, July, August and September). The region with the highest percentage y/y growth was the South Atlantic, which was second in tons consumed at 4,968,000.

Figure 3 illustrates the census regions historic growth from 2004 to present. The two volume leading regions include the West South Central and the South Atlantic. The South Atlantic region has accelerated rapidly thus far in 2016, while the West South Central has plateaued. Figure 4 charts momentum from 2004 to present. Momentum has been negative for five consecutive months after a string of 6 months of positive momentum. In its fall 206 forecast the Portland cement Association estimated that cement consumption would increase 3.0% in 2017 to 104,586,000 tons.

Figure 2

Canadian Portland Cement Shipments: Figure 5 presents cement shipment data from StatsCan from 2004 to present as a rolling 12 month total (12 MMT), to eliminate seasonality. The shape of the curve is similar to the US shipment history. High shipments through the boom period of the mid-2000’s followed by a bust in 2009 and gradual recovery from 2010 onward. Shipments have been down for four months in a row on a y/y basis. The most recent month was down 5.1% y/y compared to September of 2015.

Figure 5

Net Job Creation by Industry through November 2016: This employment report will probably provide the impetus for the Fed to raise rates at their Open Market Committee meeting later this month. November was the 73rd consecutive month of job growth however it looks as though a gradual slowdown is occurring. The high months in 2015 were lower than 2014 and that trend continued into 2016. Manufacturing data has been disappointing this year as construction has been encouraging. Primary metals has finally shown signs of life after contracting for 21 straight months. The recent results for the road hauling sector are encouraging and job losses in the oil fields have halted. In the big picture, layoffs are historically low and job openings are close to all-time highs.

In November net job creation was a seasonally adjusted 178,000 which was about in line with analysts’ expectations. September employment numbers were revised up by 17,000 and October down by 19,000. Using a three month moving average, (3MMA), the result for November was 176,000 up from 175,000 in October. Figure 6 shows the 3MMA of the number of jobs created as the blue bars since 1990.

Table 2 slices total employment into service and goods producing industries and then into private and government employees. In November, 156,000 jobs were created in the private sector and government gained 22,000. Service industries expanded by 161,000 in November as goods producing industries driven by construction expanded by 17,000. In November manufacturing in its fourth consecutive month of decline lost 4,000 jobs and for the year as a whole is down by 60,000. Half of the YTD loss occurred in the last four months. Total manufacturing employment was 0.4% less than a year ago and 0.1% lower than two years ago. In the last three months primary metals have been doing better than manufacturing as a whole with a small total gain of 800 jobs. Oil and gas extraction gained 1,100 jobs and has had positive growth for the last three months. Truck transportation also added 1,300 people. Trucking lost 11,200 people in the period February through June but has more than made up that loss with a gain of 15,600 in the last five months. Motor vehicles and parts have been stagnant for the last three months with a total gain of only 1,000 positions.

Construction was reported to have gained 19,000 jobs in November and is up by 107,000 YTD. There is no sign of a slowdown in the growth of construction employment as 59,000 of the YTD gain has occurred in the last three months. Construction has added 1,204,000 jobs and manufacturing 807,000 since the recessionary employment low point in February 2010, (Figure 7). Construction has leapt ahead of manufacturing as a job creator but the growth of construction productivity is very low, (or non-existent), in contrast to manufacturing where it is very high. The difference is the difficulty of automating construction jobs.

Figure 6

Table 2

US Gross Domestic Product 3rd Q 2016 2nd Estimate: The annualized GDP growth rate in the 2nd estimate of the 3rd quarter of 2016 was 3.15% which was up from 2.91% in the first estimate and up from the final result of 1.4% in the 2nd quarter. This was the best headline result since the 3rd Q of 2014 but on second glance not so good. The contribution of personal consumption was down in Q3 and the construction components were lack-luster. The biggest difference between Q2 and Q3 was the contribution of inventories which changed from negative 1.16% in Q2 to positive 0.61 in Q3 a swing of 1.77% and accounted for the whole of the change in Q3 and then some. Declining inventories have a negative effect on the overall GDP calculation and this was the case for the previous five quarters. Over the long run inventory changes are a wash and simply move growth from one period to another.

GDP is measured and reported in chained 2009 dollars and in the 2nd estimate of Q3 was $16.713 trillion. The growth calculation is misleading because it takes the Q over Q change and multiplies by 4 to get an annualized rate. This makes the high quarters higher and the low quarters lower. Figure 8 clearly shows this effect. The blue line is the trailing 12 months growth and the black line is the headline quarterly result. On a y/y basis GDP was up by 1.5%, an improvement from 1.28% in the 2nd quarter. In the last six years, since Q1 2011 the trailing 12 month growth of GDP has ranged between a high of 2.88% to a low of 1.07% therefore the latest result remains at the low side of this range.

Figure 9 shows the headline quarterly results since 1990 and the October IMF forecast through 2021. In their October revision, the IMF downgraded their forecast of US growth in 2016 from their April 2016 estimate of 2.4% to 1.58% and downgraded 2017 from 2.50% to 2.20%.

Figure 10 shows the contributors to GDP since Q1 2007 and describes the quarterly change in the six major subcomponents. In the 2nd Q the negative contribution of inventories was the greatest since Q1 2014 and in the 3rd Q the positive contribution was the greatest since Q1 2015. The contribution of personal consumption was 1.47% down from 2.88% in Q2 but up from 1.11% in the 1st Q. Personal consumption includes goods and services, the goods portion of which includes both durable and non-durables. Government expenditures contributed negative 0.3% in Q2 and positive .09% in Q3. The contribution of fixed residential investment at negative 0.24% in Q3 and negative 0.31% in Q2 were the first quarters that this component detracted from GDP since Q1 2014. Fixed non-residential investment which includes infrastructure declined from 0.12% in Q2 to 0.02 in Q3.

Figure 8

Figure 9

Oil and Gas Prices and Rotary Rig Counts. November 2016: Last week OPEC said it reached agreement to cut 1.2 million bpd of crude oil output from October levels. Oil prices increased over 15%, (Brent reached $54 yesterday, WTI $52), since the November 30th meeting. On December 6th oil prices rolled back 4% as doubt began to creep in that OPEC members would actually adhere to the planned cuts. Iran and Iraq, OPEC’s 2nd and 3rd largest producers are balking at the cuts proposed by Saudi Arabia making an agreement difficult to reach. There is speculation that US shale oil producers will ramp-up production if prices rise beyond break-even levels. US oil inventories have steadily increased reaching 489 million barrels per week after hitting a recent low of 469 on September 30th. Figure 11 shows US oil inventories on the left axis and the price of WTI on the right axis on a reverse scale. We would expect that basic supply and demand rules would dictate that as inventories rise, price falls. This was the case for most of 2014and approximately one-half of 2015 at which time the relationship completely fell apart. We can only conclude that OPEC’s efforts to restrain US shale oil production has distorted the historic demand: supply relationship.

Figure 12 shows historical oil and gas prices since January 2000. The price of natural gas, delivered the Henry Hub in Louisiana closed at $2.96 / MM BTU on November 18th, up from $1.57 on March 4th. November 18th 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.

The total number of operating rigs in the US and Canada on December 2nd was 597, up from a low of 404 on May 27th. In that time frame the oil rig count was up from 316 to 477 and the gas count was up from 87 to 119. Figure 13 shows the Baker Hughes US Rotary Rig Counts for oil and gas equipment in the US through December 2nd. US oil rig count has been on an upswing up 51% since May 27th. The gas rig count bottomed out at 81 on August 26th and has ticked-up 37% since then.

On a regional basis in the US, the big three states for operating rigs are Texas, Oklahoma and North Dakota. Texas at 285 was up from a low point of 173 on June 20th but still down from 318 at the beginning of the year. Oklahoma at 81 on December 2nd was up from its low point of 54 on June 24th but down from 87 at the beginning of the year. North Dakota at 31 on December 2nd was up from its low point of 22 on June 3rd but down from 53 at the beginning of the year.

Figure 11

Figure 13

US Preliminary Steel Long Product Imports: October 2016 preliminary long product imports totaled 477,000 tons (kt), up 3% over September final imports, (Table 3). Preliminary rebar imports fell 33% m/m, as licenses to import for Turkey and Vietnam were not full filled. Under US import regulations, Turkey and Vietnam have up to 75 days to import those products. This adds 23kt to November’s potential rebar imports. Preliminary wire rod imports rose 15% m/m as Turkey and Japan took advantage of another US import regulation allowing application for import licenses up to 10 days after the end of the month. This resulted in an additional 5,500 tons over month end licenses counts.

Preliminary heavy structural October imports rose 68% m/m, with Spain, South Korea, and Russia taking advantage of the post month 10 day regulation, shipping an additional 14,100 tons over what was originally applied to import in October. The beam component of this category was down 5% m/m, indicating that the increase was most likely heavy angles and channels.

Products defined by the Commerce Department’s Steel Import Monitor as cold finished bars (CFB) were flat m/m, while hot-rolled bars (HRB) rose 16% with the announcement of October preliminary imports. These two product definitions are comprised of merchant bars (MBQ) and special bar quality products (SBQ). Final MBQ imports for the last 24 months, revealed that approximately 20% of HRB imports are merchant bars. Based on this rolling average it is estimated that preliminary MBQ imports rose 14% in October, while SBQ rose 15% m/m. Year to date the US has imported 909kt of SBQ a decrease of 25% YTD y/y. Special bar quality imports have been on the decline since peaking in 2013 and are down 43% since then, (Figure 14).

Table 3

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