Weekly Market Update - November 19, 2015

Architectural Billings Index: The American Institute of Architects reported that its national all project ABI score for October was 53.1 down 0.6 points from September’s value, (Fig. 1). Recall that a value north of 50 indicates expanding billings and less than 50 means contracting billings. On a regional basis, the South recorded the strongest number at 56.2, followed by the West at 54.4, the Midwest at 52.6 and the Northeast at 49.2, (Fig. 2). The ABI is a leading indicator of construction activity looking about 12 months into the future. An increasing ABI value at this time is encouraging news for non-residential construction heading into 2016. Of particular interest is the commercial / industrial sub-index posted which recorded a strong 55.1, while the design contracts index came in at 51.7, (Fig. 3).

Fig 1

U.S. MSCI Report: Shipments of all carbon steel products fell 10.2% y/y October, led down by a 16.7% drop in bar and shapes shipments and a 15% reduction in plate shipments. All carbon steel shipments were down 7% compared to two years ago and down 1.8% compared to three years ago.

Inventory levels average across all carbon products fell 3.9% y/y, ranging from a 25.1% crash for plate to a 4.2% increase for sheet products. Bar & shapes, plate and pipe & tube inventories are down compared to levels two and three years ago, (Table 1).

Daily intake plummeted 16.7% y/y across all products, led down by plate, off 35.5%, pipe & tube down 27.2%, bar & shapes off 24.7% and structurals down 18.1%. Sheet intake declined by the least, at -12%.

Fig. 4 presents a line chart of the five product groups’ daily shipment levels presented as a percent of the high water mark of 2006 & 2007, set at 100%. Presenting the data this way gives perspective on where MSCI product shipment levels rank compared to recent history. Thus far in 2015, plate, strip and bar are trending downward, while pipe and structurals are relatively flat. In 2015 YTD, flat products are hovering in the 80% of peak range while longs have not performed as well. Pipe & tube is trading in the middle seventies, while bar and structurals remain in the 55 to 60%.

Table 1

Canada MSCI Report: Shipments of all carbon steel products fell 10.3% y/y October led down by a 24.1% drop in plate. All carbon steel shipments were down 11.5% compared to two years ago and down 12.9% compared to three years ago.

Inventory levels average across all carbon products fell 12.6% y/y ranging from a 24.8% plummet for plate to a 1.3% increase for structurals, (Table 2).

Daily intake plunged 32.8% y/y across all products, led down by a 43.2% decline for sheet and a 31% fall in plate.

Fig. 5 presents a line chart of the five product groups’ daily shipment levels presented as a percent of the high water mark of 2006 & 2007, set at 100%. Presenting the data this way gives perspective on where MSCI product shipment levels rank compared to recent history. Structurals are the only product group to record some growth in 2015, all other product groups are flat to down.

Table 2

U.S. Scrap Exports: US scrap exports jumped 17.5% m/m ending September but are down 13% on a rolling 12 month y/y basis. Turkey purchased 456,000 tons in September up sharply from its six month average of 290,000 tons. Turkey consumed 39% of US scrap exports in September, (Fig. 6).

Fig. 7 charts the top four US scrap destinations form 2010 to present as well as the total and the linear trend line. Year to date 2015, the Turkish took 29.3% of US scrap exports, followed by Taiwan at 14.7%, South Korea at 8.9% and China at 5.6%. Clearly the demand for US scrap exports is in decline. Demand peaked in 2011 at 24.1 million tons (mt), falling to 22.0 mt in 2012, 18.5 mt in 2013, 15.3 mt in 2014 and is headed for an estimated 13.2 mt in 2015. Fig. 8 shows that the decline in demand for US scrap exports is largely a function of the strong US dollar which has gained 9.5% against the Broad index (basket of currencies) on a rolling 12 month basis y/y. An additional contributing factor is the global decline in iron ore prices which has led to the export of blast furnace based billets to Turkey and elsewhere thereby lessening the demand for imported scrap.

Fig 7

Net Job Creation by Industry through October: The Bureau of Labor Statistics (BLS) analysis of non-farm employment reported that 271,000 jobs were added in October, which was well above economist’s consensus expectations. August's gains were revised up by 17,000, but September's were revised down by 5,000. The three month moving (3MMA) of gains through October was 187,000. Monthly job gains have averaged 206,000 per month in the ten months of 2015, (Fig. 9). Total nonfarm payrolls are now 4,289,000 more than they were at the pre-recession high of January 2008.

Table 3 slices total employment into service and goods producing industries and then into private and government employees. Total employment equals the sum of private and government employees. It also equals the sum of goods producing and service employees. Most of the goods producing employees work in manufacturing and construction and the major components of these two sectors are also shown in Table 3. In October, 268,000 jobs were created in the private sector and 3,000 in government. Since February 2010, the employment low point, private employers have added 13,493,000 as government has shed 488,000. In October service industries expanded by 244,000 as goods producing industries added 27,000 people. Since February 2010, service industries have added 11,078,000 and goods producing 1,927,000 positions. Table 3 shows that manufacturing gained 16,000 jobs in September. In all of 2015, manufacturing has actually lost 1,000 jobs, therefore is statistically unchanged, another indication along with the ISM Manufacturing Index and the Federal Reserve Industrial Production Index that growth in this sector has slowed. Note the subcomponents of both manufacturing and construction shown don’t add up to the total because we have only included those that have most relevance to the steel industry. Primary metals lost 1,500 jobs in October, is down by 2.4% in the last 12 months and has not had a single positive growth month in 2015. Motor vehicles and parts gained 1,200 jobs in October, oil and gas extraction has had negative job creation in all four time periods examined in Table 3. Truck transportation gained 400 jobs in October but is down by 2,400 in the last three months. Construction added 31,000 jobs in October which was the best result since February. Some of the major construction sub categories are routinely reported one month in arrears which distorts the data in Table 3. Since the bottom of the employment recession, construction has now crept ahead of manufacturing as a job creator. Having said that, it must be recognized that productivity increases in manufacturing are very much greater than they are in construction. Construction has added 934,000 jobs and manufacturing 884,000 since the recessionary employment low point in February 2010, (Fig. 10). Based on the total construction analysis that we report in our CPIP update, we assume that construction jobs will continue to expand assuming labor can be found. Construction has been holding back steel demand but that should increasingly not be the case.

Fig 9

Global Steel Production through October: The World Steel Association short range forecast for 2015 and 2016 has a 1.7% contraction in demand this year followed by a 0.7% expansion next year. This forecast, released last month already looks optimistic for 2015 since production was down by 2.0% in 12 months through October and deteriorating. (Note this forecast is steel consumption, not crude steel production.)

Global steel production in 12 months through October totaled 1.609 billion tonnes with a capacity of 2.3 billion tonnes. If we assume that the maximum sustainable capacity utilization is 90% then effective capacity is 2.07 billion tonnes. This means that excess, (unused) capacity in 12 months through September was 2.07 minus 1.61 = 460 million tonnes, well over half of which is believed to be in China. Fig. 11 shows the three month moving average of monthly production and capacity utilization through October. As production has increased each year since the recession, capacity utilization has decreased, the gap is widening. Capacity utilization in three months through October was 68.4%, down from 72.2% in three months through April. Table 4 shows global production broken down into regions and also the production of the top ten nations in the single month of October and their share of the global total. It also shows the latest three months and twelve months production through October with year over year growth rates for each. Regions are shown in white font and individual nations in beige. If the three month growth rate exceeds the twelve month we interpret this to be a sign of positive momentum and accelerating growth. The situation this year is the reverse with negative momentum. The world as a whole currently has a negative growth of 3.4% in 3 months and negative 2.0% in 12 months. All regions except the CIS had negative growth and negative momentum in the latest data. The positive performance of the CIS was driven by Ukraine which had a growth of + 9.4% in three months through October year over year. Germany and India were the only other countries to have positive y/y growth in three months through October. In the October data China was down by 3.2% in three months year over year, North America was down by 7.0% in total with the US down by 9.9%, Canada down by 5.7% and Mexico up by 5.5%. The European Union was down by 3.1% and other Europe was down by 7.2% led by Turkey down by 8.2%.

Fig. 12 shows the 3MMA of the monthly year over year growth of global steel production which was negative in March for the first time since the recession.

Fig 11

Fed Reserve Statement – FOMC Minutes Release: The meeting minutes from the October 27-28 FOMC meeting were released on Wednesday November 18th. The meeting reiterated that, at the current time, interest rates would remain between the zero and ¼ percent range. Weaker than normal payroll numbers over the past couple months along with global economic scenarios led to this decision. Some members have noted that it was already time to raise interest rates while others stated that rates could rise in December if economic data, realized and expected, would warrant it. The members discussed the natural real interest rate; that is, the interest rate when the economy is functioning at full employment. During the recession, this figure was below zero at times and is currently around zero percent – well below the 2% inflation mandate typically regarded by the FOMC.

The committee members noted that job gains were lower than expected despite the unemployment rate hovering near the long term full employment mark. Notably, members stated that they were unsure if the recent decline in job gains growth were temporary or more of a permanent situation and that in future meetings these developments would need to be discussed. Consumer spending would rise gradually as the primary driver of economic growth. Inflation, some committee members said, would not reach the 2% long term goal until the end of 2018, (Federal Reserve). Overall, the FOMC meeting yielded many mixed responses in regards to the timing of raising interest rates for the first time since 2006.

Federal Reserve

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