Weekly Market Update - May 14th, 2015

Net Job Creation: for April totaled 223,000, getting back on track for momentous job growth after March’s dismal report. February’s figure were revised upward 2,000 to 266,000; however, March’s net job creation was revised down dramatically from +126,000 to +85,000. Despite the lower than predicted job creation, the U.S. economy has had positive job growth for 55 straight months dating back to October 2010. The U-3 unemployment rate stayed at 5.4%, among the lowest since Q2 2008, (Fig. 1). Labor force participation has not been at or above 63.0 since February 2014 and among the lowest on record dating back to 1980. The employment to population ratio has appeared to stabilize around the 59.3 mark, however, is still roughly 4 percentage points lower than the pre-recession highs, (Fig. 2).

The U-6 unemployment figure, which includes those persons who are marginally attached to the labor force, dipped again for the tenth consecutive month to 10.8%. This is the lowest rate since August 2008. This figure has been steadily declining since the end of 2010 and has plunged 1.9 percentage points since January 2014. The long term unemployed, those unemployed for 27+ weeks, fell yet again in April to 29.0 from 29.8. This is the lowest share for this group since June 2009. Long term unemployment has dropped more than 1.1 million person on a y/y basis.

Net job creation has slowed in the past three months and core inflation has been below the 2% benchmark. The long term unemployed (six months or longer) and involuntary part time workers have made measured progress in in job creation; however, wage growth has stagnated, under 2% y/y, since the end of the recession leading to a considerable amount of slack in the labor market. Recent FOMC minutes have indicated that Janet Yellen and the Fed Presidents may hike the Fed Funds rate later this year despite the unpredictable job readings and low inflation. An early hike may hurt the economy worse in the short and medium term than overshooting the 2.0% inflation target.

Fig 1

Fig 2

JOLTS: The U.S. Job Openings & Turnover Survey reported 4.991 million job openings at the end of March, a 3% decline from February but up 16% on a y/y basis, (Fig. 3). The most significant detail from the release was the quits rate. There were nearly 2.8 million workers who quit their jobs in March, the most since Q1 2008. This is a positive sign of an improving job market since employees are confident enough to leave their jobs voluntarily in search of another, (Fig. 4). On the contrary, there is still a lot of room for growth in this category as the mid-2000s expansion were experiencing 3 million quits a month regularly. Perhaps when wage growth, under 2.5% since late 2009 (, accelerates, the economy will see these figures rise.

All four regions experienced job opening declines in March from February. The West and Northeast both dropped 4% m/m. The South also fell at a slower pace of 3%. The Midwest only fell 2% from February, however, the region is up 21% on a y/y basis.

The Construction Industry experienced a steep decline of 9% in March after February’s strong showing growth of +14%. Despite the poor report, the industry is up 16% on a y/y basis and is + 108,000 net jobs created YTD through April. Manufacturing job openings slid 1% in March. The industry typically experiences volatility in month over month figures. Despite the fall, the industry is up 13% on a y/y basis and is + 21,000 in net jobs created YTD through April. Trade, Transportation, and Utilities also fell in March, with a 5% drop in job openings. This is the largest decline since September 2014. The industry is up 18% on a y/y basis.

Overall, mixed results in March from the released report. All regions and industries experienced a drop m/m but the total quits rate is something to take note of going forward as the jobs data should get stronger as the winter months abate.

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Fig 4

China Steel Production & Exports: China steel production through March 2015 totaled 200 million tonnes (Mt), down 1.7% y/y, as reported by China Metals Weekly. Chinese global exports totaled 25.8Mt, a y/y increase of 51%, representing 9.7% of production, (Fig. 5). Chinese steel shipments to the US, as reported by S.I.M.A., totaled 273,000 tons in March 2015, up 35.6% y/y. China’s exports to the US comprise 1% of the 8.5 million tons exported globally.

China’s long product output totaled 116.4Mt in the three months through March 2015, falling 5.2% y/y. Long product exports from China totaled 10.1Mt, up 52.5% y/y, (Fig. 6). Fig. 7 illustrates long product production by segment and shows rebar comprised 41% of China’s long product output. Less than 1% of rebar tonnage produced was exported. Bar production comprised 15% of long product output, as China committed 34% of production to global exportation, (Fig. 8).

Fig 5

European Situation: From time to time we review the ongoing European saga because we believe this has the greatest potential for disruption of the long products market at some future date. The precedent is 2001 when the Euro declined to 84 US cents and US steel markets were flooded with imports to a very much greater extent than today’s situation. Fig. 9 shows the historical position for beams which was typical of all steel products after the Far Eastern currency crisis. The first peak in 1998 was sourced in Korea and Japan and was successfully eliminated by a trade case. The second peak in 2000 was mainly material from Europe and the trade case failed being ruled as a currency issue with no dumping. If countries such as Spain and Italy were to leave the Eurozone and revert to the Peseta and Lira then the US import situation could be worse than in 2000. At present we are dodging this bullet, the Euro is up by 5.6% in the last month and most of that appreciation has happened in the first two weeks of May, (Fig. 10). For the first time since 2010, all four of the Eurozone’s largest economies (Germany, France, Italy and Spain) recorded growth. And for the first time since Q1 of 2011, the currency area grew more rapidly than the U.S. The Eurozone economy expanded by 0.4% in Q1 2015, marking a pickup from the 0.3% growth recorded in Q4 2014.

The situation with Greece keeps on rolling. Greece paid off its latest installment to the IMF on Tuesday with its IMF reserves. The problem is that the Troika - the European Commission, International Monetary Fund (IMF), and European Central Bank (ECB) - do not want to set a precedent for future negotiations with other bailed-out countries. Moreover, Spain will hold a general election later this year, and giving into the Syriza government in Greece could drive further support for Podemos (a similar left-wing party that was formed in 2014 and could win the election). A repeat of these negotiations next year with members of Podemos is the last thing they want. Instead, the Troika is hoping that Spain's economic recovery continues, and support for Podemos will wane, discouraged by the lack of concessions won by Greece.

Fig 9

Fig 10

Supply and Shipments of Long Products through March 2015: This report compares supply to the market, (a proxy for market demand) and domestic mill shipments to enable a side by side comparison of the degree to which imports have absorbed demand. Sources are the American Iron and Steel Institute and the Department of Commerce with analysis by Gerdau. The data in Table 1 are the average tonnages for three months and compare Q1 2015 with Q1 2014. Total supply to the market was up by 1.4% but mill shipments were down by 10.2%. In other words, imports took what little demand growth there was and much more. This situation was particularly acute for heavy structurals where demand was up by 0.2% but shipments were down by 18.1%, however the same trend exists for all categories of long products. Apparent supply is defined as domestic mill shipments to domestic locations plus imports. In Q1 2015 the average monthly supply of long products was 2,354,670 tons, down by 1.7% from Q4 last year and up by 1.4% from Q1 2014. Table 2 shows the change in supply by product on this basis and also the comparison with Q1 2013. Supply of all products except rod and drawn wire was down compared to Q4 last year. Fig. 11 shows the long term supply picture for individual long products since January 2006. Table 3 shows the total shipments of longs which includes exports. There is a sharp contrast to the supply table, all products are in negative territory year over year. Fig. 12 shows the shipment situation by product since January 2008. Rebar and structurals have had the most severe decline in shipments in the last six months and have now given back all the growth that occurred since early 2013.

Table 1

Table 2

Rail Indicators Report (AAR) : As defined by the Association of American Railroads, (AAR); Freight railroading is a “derived demand” industry: demand for rail service occurs as a result of demand elsewhere in the economy for the products railroads haul. Thus, rail traffic is a useful gauge of broader economic activity, especially of the “tangible” economy.

April 2015 U.S. freight rail traffic total carloads decreased by 5.3% y/y. If carloads of coal are excluded, the percentage change measures -1.7%. On an YTD basis, total carloads were off 1.4% y/y, excluding coal the total improves to +1.0% y/y. Intermodal traffic increased by 5.1% y/y and by 1.8% YTD y/y. Combined rail carloads plus intermodal traffic was down 0.4% y/y and flat YTD y/y, (Fig. 13).

Most major sectors posted weaker carload shipments in April to include: Agriculture and food products (-1.9% y/y, +4.1% YTD y/y), Chemical and petroleum (-0.6% y/y, +0.8% YTD y/y), Coal (-11.1% y/y, -5.1% YTD y/y), Metallic ores and metals (-3.0% y/y, -2.4% YTD y/y), Non-metallic minerals (-4.3% y/y, +1.0% YTD y/y). Forest products (+0.6% y/y, flat YTD y/y) and Motor vehicles and parts (+0.8% y/y, +1.1% YTD y/y) were the only major categories to record gains in April.

Within the category of Metallic ores and metals, Metallic ore carloads (mostly iron ore) increased 43.3% April y/y and by 25.6% YTD y/y while iron and steel scrap fell 14.4% for both April on April and YTD y/y. This would suggest that steelmakers are substituting iron ore for scrap. Shipments of primary metal products was down 16.9% April y/y and down10.4% YTD y/y. As Fig. 14 illustrates both carloads of steel and other primary metal products as well as carloads of iron and steel scrap are off to a poor start in 2015, lower than each of 2012, 2013 and 2014.

Canadian total carloads were down 1.9% y/y, but posted a 0.1% increase excluding coal. On a YTD y/y basis total carloads rose 3.8%, and by 5.2% excluding coal shipments. Canadian intermodal traffic was up 4.6% April y/y and surged 9.8% YTD y/y.

Examining the major categories yields mixed results in April: Agriculture and food products (-14.4% y/y, -4.1% YTD y/y), Chemical and petroleum (+3.1% y/y, +6.2% YTD y/y), Coal (-17.0% y/y, -6.7% YTD y/y), Metallic ores and metals (+14.3% y/y, +16.9% YTD y/y), Non-metallic minerals (-8.1% y/y, +4.1% YTD y/y). Forest products (+6.7% y/y, +9.8% YTD y/y) and Motor vehicles and parts (+7.5% y/y, +5.3% YTD y/y). Combined rail carloads plus intermodal was up 0.8% y/y and up 6.0% YTD y/y, (Fig. 15). This is the best start in multiple years indicating underlying strength in the Canadian economy.

Within the category of Metallic ores and metals, Metallic ore carloads (mostly iron ore) increased 21.4% April y/y and by 22.1% YTD y/y while iron and steel scrap fell 14.2% for both April on April and was down 8.3% YTD y/y. Once again this suggests that steelmakers are substituting iron ore for scrap. Shipments of primary metal products was down 7.5% April y/y but was up 2.2% YTD y/y.

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U.S. Import License Data: Long product import licenses for April totaled 543,420 tons, a 17% decline from the March preliminary number of 652,896 tons. Year to date, long product imports plus licenses exceeds 2.2 million tons, a 10% y/y increase over the same period last year.

Rebar licenses fell 44% m/m as Turkey and Japan’s volume declined by 47% and 55% respectively. Wire rod shipments from Turkey declined by 74% resulting in an overall 14% drop in wire rod licenses for April. Merchant bar licenses recorded 26,286 tons in April, a reduction of 6% over March, but up 25% YTD y/y. Beam (a subset of structurals) licenses increased 1% m/m to 77,889 tons but on a YTD y/y basis were up 115%, (Table 4).

Table 4

Steel Demand Indicators: Table 5 is a snapshot of the market situation on 5/14/2015. 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, 9 are negative and 10 are neutral. This was a decrease of one positive and an increase of one in the neutral category since we last published on April 30th. The one change arose from the Federal Reserve Senior Loan Officer Survey for the 2nd quarter in which demand for commercial and industrial loans which had been improving since Q1 2012 became net neutral. Overall this is the lowest number of indicators to be classified as positive since September 12th 2013.

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 an increase of one in the negative category and variables trending positive were unchanged at 17. One variable, Chicago shredded had been classified as unchanged in April. Our observations about trend changes since the last update are as follows. In the General Economy net job creation bounced back with a gain of 223,000 up from a revised gain of 85,000 in March. In this analysis we report year over year gains which for total employment was 2,982,000. On the same basis construction has gained 280,000 and manufacturing 180,000. As mentioned above the demand for C&I loans became less robust and its trend changed from positive to negative. In the long products section Chicago shredded became positive as the May price advanced by $10 and net imports, though still very high declined. There were no changes in trend direction for either construction of manufacturing. Total construction grew at a robust 7.0% rate in three months through March y/y and the Industrial Production index advanced by 3.3%. The ISM Manufacturing Index is still indicating positive growth but there has been a negative trend for six straight months as growth has slowed. (Explanation of Indicators).

Table 5

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